EDS ( EDS) shares dropped 6% Thursday after a leading bond ratings agency cut the computer outsourcing firm's debt to junk. Moody's cut EDS' senior unsecured debt rating to Ba1, the highest junk rating, from Baa3, the lowest investment-grade rating. The New York-based bond rater cited the Plano, Texas, company's slow progress in its turnaround. Lower ratings make it more expensive for companies to borrow money. That's a significant disadvantage in the cutthroat outsourcing business, which is inhabited by blue-chip players like IBM ( IBM) and Accenture ( ACN). EDS took issue with the downgrade, saying it is making progress on its revamping. "We have taken a series of aggressive steps to support our investment-grade rating," the company said. "Given our progress and sound financial footing, we are in strong disagreement with Moody's decision. EDS has significantly reinforced its financial foundation, improved its competitiveness and fully expects to meet its guidance on second-quarter 2004 results." EDS said it expects to post second-quarter GAAP earnings of 54 cents, and to report a pro forma loss of 3 cents a share. That's at the midpoint of its prior pro forma guidance. The pro forma loss excludes a gain of 81 cents on the UGS PLM Solutions sale, termination-related charges on a contract and previously announced restructuring charges. Second-quarter revenue will reach the high end of its prior guidance of $5.1 billion-$5.2 billion, EDS said. EDS
warned two months ago that its credit rating might be at risk. The warning came as EDS was already fighting -- and failing -- to gain market share in the highly competitive computer services industry. In its glory days, EDS relied on high-profile "megadeals" to grow its business. But the huge contracts required significant cash investments that, in some cases, have yet to pay off. Indeed, the company's largest megadeal -- a contract to create the Navy-Marine Corps Intranet -- has turned into a disaster. On Thursday, EDS slipped $1.09 to $16.59.