Moody's cuts HP ratings

More creditworthy than Japan

Credit agency Moody's Investor Services cut its ratings on Hewlett Packard Co's debt by a notch on Friday citing the "challenges and uncertainties" the company faces in integrating Compaq Computer Corp, which it acquired in May.

HP's senior unsecured debt was cut from A2 to A3, its long-term subordinated debt from A3 to Baa1, and preferred stock (shelf) from Baa1 to Baa2. Moody's also declared the outlook negative.

However, while HP becomes the latest tech firm to come out on the wrong side in a Moody's review, its debt is still rated way above the junk or near junk levels at which many telecoms firms are languishing.

Moody's said the combined HP/Compaq operation will face challenges exploiting cost synergies in "a very difficult economic and competitive environment." It noted that the company was still seeing operating losses in two segments that together account for 55% of revenues, and added that the weak demand environment will put continued pressure on revenues and profitability.

Those segments are personal systems and enterprise systems, which Moody's noted are "critical to the strategy of providing end to end hardware, software and service solutions." Because of the inevitable disruption as the integration of HP and Compaq continues, Moody's expects both businesses to continue to lose money over the near term.

Looking ahead, Moody's said it was taking a negative outlook on HP, because of the "likelihood of prolonged and deeper weakness in overall corporate and consumer demand" which could offset near term cost savings and delay a return to increased profitability. Perhaps more worryingly for Palo Alto, California, Moodys "remains concerned that full and consistent execution of the scale-based cost synergies could prove more challenging than expected."

On the plus side, Moody's paid tribute to HP's strong printer business, which it said generates solid and consistent profitability, as well as the consistent profitability of the overall services business.

Moody's also noted that HP showed "solid liquidity" and a "lowly leveraged balance sheet". It said it expected that HP's capital structure will remain conservative.

HP appeared to take a sanguine view of the action by Moody's, saying it was pleased that the firm recognized its strong balance sheet and liquidity.

"We're working diligently to achieve the merger synergy gains as rapidly as possible, HP added. "These gains will have a positive impact on our enterprise systems and personal systems groups, and we expect to restore profitability in these two businesses in 2003."

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