S&P Says EDS Downgrade Might Be Severe

It says the outsourcer faces a potential two-notch lowering.
By Meredith Derby ,

Standard & Poor's

, which earlier this month warned it was reviewing

Electronic Data Systems

(EDS)

for a possible debt downgrade, now says that downgrade might be more severe than originally believed. The ratings service cited EDS' weak operational performance.

EDS is a consulting, outsourcing and Internet commerce company that lost $126 million in the first quarter. S&P has put EDS's A-2 short-term corporate credit and commercial paper ratings on CreditWatch with negative implications, the first step before a full-blown downgrade.

S & P said: the status now means that long-term ratings might be lowered two notches to BBB from A-, rather than one notch to BBB+ as previously expected. EDS has about $5.4 billion in total rated debt.

S & P cited persistent weak operational performance in each of EDS's major lines of business. The ratings service also said EDS's in-house review, which is not expected to be completed until June, could affect 2003's earnings and cash flow outlook. "Although management's targets include improved competitiveness, renewed growth, and a strengthened balance sheet, the costs, execution risks, and change to the business profile arising from the strategic review are unclear at this point."

On May 8, S & P put EDS' long-term rating on review for downgrade.

Shares of Plano, Texas-based EDS were recently at $18.37, unchanged, in late afternoon trading.

The ratings service said it will meet with EDS' management to assess balance sheet expectations and the company's upcoming performance.

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