Moody's Investors Service cut ratings on

Hewlett-Packard

(HPQ) - Get Report

debt after the bell today, citing postmerger integration difficulties and ongoing losses in its key PC and server and storage businesses. Those divisions have lost a combined $1.6 billion over the last year.

Shares of H-P were relatively unmoved, trading slightly higher in afterhours trading after closing down 0.9% to $17.35 on Friday.

Moody's cut ratings on senior unsecured debt to A3 from A2, and on short-term date to Prime-2 from Prime-1, with a negative outlook. The agency said its outlook reflects the potential for already-weak consumer and corporate demand to drop further.

To put the new rating in perspective, H-P's ranking is now at the same level as

Dell

(DELL) - Get Report

, one notch below that of

Texas Instruments

(TXN) - Get Report

and two notches below that of

IBM

(IBM) - Get Report

.

The downgrade isn't expected to seriously hurt H-P's ability to secure financing. "H-P doesn't really rely that much on short-term borrowing," says Richard Lane, senior vice president and analyst at Moody's, "though lower ratings tend to cause an increase in borrowing costs."

But the downgrade is bound to annoy investors who've already gotten their share of bad news from H-P. The company acknowledged last week that revenue is likely to drop 5% to 7% in the second half of fiscal 2002. Earlier, the company had forecast growth of 2% to 3%.

Between then and today's close, the stock lost 8%.

Compounding the pain of a tough external environment, H-P faces internal disruption due to the merger with Compaq, Moody's said. As a result, it expects the company to continue losing money over the near term in its personal systems and enterprise segments, which account for 55% of revenues.

The agency also said the company may have more trouble than expected in cutting costs, though H-P recently said it was a year ahead of schedule to meet its goal of $2.5 billion in cost synergies.

In the plus column, the ratings review praised the strong market position and profitability of H-P's printing and imaging business, which accounts for 26% of revenue and earned $2.3 billion of operating profit over the latest 12 months.

Also in its favor, H-P can boast of hefty corporate coffers. As of April 2002, it claimed $12.9 billion in cash and short-term investments and $4 billion in credit facilities, though it will probably need to consume cash over the next few quarters to pay for restructuring and new product rollouts.

Lane said Moody's will be looking in the coming quarters for "some demonstration of the execution of the integration plan," while keeping a lookout for a pickup in IT spending.

In its note today, Moody's added that Compaq's credit rating remains under view for possible upgrade, depending on whether H-P decides to guarantee Compaq's debt.