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Hewlett-Packard Co. (HPQ) had its credit ratings cut by Moody’s Investors Service, which cited concern about the computer maker’s ability to contend with competition and “execution challenges.”
Moody’s cut the company’s long-term credit ratings (HPQ) to Baa1, three levels above junk, from A3, the credit-rating company said in a statement. Its outlook is negative.
Hewlett-Packard is taking an $8.8 billion writedown related to alleged falsified accounting at Autonomy Corp., the software maker it acquired last year. That’s compounding challenges, including management upheaval and dwindling demand for personal computers, that have cast doubt on a push by Chief Executive Officer Meg Whitman to revive growth. About $25 billion in debt is affected by the cut, Moody’s said.
“Although HP will maintain strong to leading positions in a number of product areas, the company’s credit profile will remain weaker than previously expected over the intermediate term,” Richard Lane, a Moody’s senior vice president, wrote in the statement.
Sales at Hewlett-Packard will decline 5 percent next year and operating margins will narrow, compared with the company’s historical average, Moody’s said.
“Nobody is worried about HP defaulting, but the downgrade shows a lack of confidence in HP’s turnaround and its ability to be a powerhouse going forward,” said Erik Gordon, a professor at the Ross School of Business at the University of Michigan.
The cost of protecting Hewlett-Packard bonds from default rose 2.9 basis points to 366.4 basis points as of 4 p.m. in New York, according to prices compiled by Bloomberg.
The contracts typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The contracts have risen from 349.4 on Nov. 19, the day before the company announced the Autonomy-related writedown.
Hewlett-Packard’s $1.5 billion of 2.6 percent notes due September 2017 fell 0.3 cent to 94.9 cents on the dollar to yield 3.78 percent as of 4:19 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
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