By Ronda Fears
Nashville, Feb. 14 - In response to Moody's Investors Service's downgrade of Electronic Data Systems Inc.'s ratings Wachovia Securities, Inc. convertible analysts recommend holders of EDS' 0% switch into Analog Devices Inc.
Moody's cut EDS' senior unsecured rating to Baa2 from A3 and its short-term rating to Prime-3 from Prime-2.
The downgrade triggers payments of about $137 million unless the company obtains waivers, the analysts said, and EDS will likely exit the commercial paper market after paying down its $220 million in borrowings over the next several weeks.
EDS' $500 million accounts-receivable securitization program remains available to the company, with $410 million drawn. But EDS will be unable to make additional borrowing under the program if its credit ratings fall below investment grade.
"Ending the year with $1.89 billion in cash and short-term investments and generating positive free cash flow, EDS has sufficient liquidity to make the $772 million payment when the 0% bonds are putable in October," analysts Henry Voskoboynik, Brian Park and Dmitry Melnick said in a report Friday.
However, they advise swapping into Analog Devices' 4.75% convertibles due 2005.
"We believe there is a high probability Analog Devices will call the bond on Oct. 1, giving investors' roughly the same time frame," the analysts said.
"In addition to resulting in a higher YTC (versus Electronic Data Systems' YTP), the Analog Devices bonds have a current yield of 4.72%. We also believe Analog Devices has a stronger credit profile than Electronic Data Systems.
"In case Analog Devices does not call its convert, the holder will end up owning a convert of a solid semiconductor company with an investment-grade credit rating and a 4.75% coupon for two more years. We can envision worse things happening to other investments."
EDS had total debt outstanding at year-end of $5.39 billion, including $1.24 billion in short-term debt. The next debt maturity for the company is in 2004 - the $1.6 billion mandatory convertible and $500 million of 6.85% notes.
EDS has access to an undrawn $1.25 billion credit facility made up of a five-year revolver due in September 2004 and a 365-day credit facility that can be rolled into a one-year term loan due September 2004, the analysts noted.
EDS 0% convertible due 2021
| Price: | 77.46
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| Put: | October 2003 at 79.91
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| Current yield: | 0%
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| Yield to put: | 4.80%
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| Yield to maturity: | 1.37%
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| Ratings: | Baa2/A-
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| Analog Devices 4.75% convertible due 2005
|
| Price: | 100.63
|
| Call: | October 2003 at 101.90
|
| Current yield: | 4.72%
|
| Yield to call: | 6.77%
|
| Yield to maturity: | 4.50%
|
| Ratings: | Baa1/BBB
|
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