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Sun Microsystems


received another blow from Wall Street Tuesday, as Moody's Investors Service placed $1.3 billion of the company's debt under credit watch.

Already conditioned by the company's problems, investors greeted the news nonchalantly. After losing about 3% in early trading, the stock came back and added a penny, to close at $3.59

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Moody's analyst Paul Hsu said in an interview that he was less concerned with Sun's liquidity -- it had $5.7 billion in cash and marketable securities on hand as of June 30 -- than with its longer-term prospects. "Sun's worldwide market share in computer servers continues to be challenged by gains in lower cost Linux and Windows-based servers from competitors," he said.

The ratings Hsu will review are on senior unsecured notes due between August 2004 and August 2009, all currently rated Baa1 by Moody's. Baa1 is three notches above the cutoff for investment grade debt, Shu said. Although the company is not a heavy borrower, it has filed a shelf registration for additional debt, which would become more expensive should Moody's cut its rating.

"The review will focus on Sun's earnings prospects given the intense competitive environment the company faces in its core products and services, which places significant downward pressure on margins," Shu said.

On a per-share basis, Sun's earnings have been in the black only once over the past nine quarters -- in the June quarter of 2002, when Sun eked out a one-penny profit. In the third and fourth fiscal quarters of 2003, net income of $12 million and $4 million proved too dinky to translate to positive EPS, which remained stuck at the break-even point.

Sales have been dismal, too. In fiscal-year 2003 ending in June, revenues from hardware -- which accounts for about three-fourths of total sales -- dipped 14%. The company reported a massive $2.4 billion loss, though $2.1 billion of that reflects a writedown for impaired goodwill.

Sun replied to the move, saying in a prepared statement: "With a strong financial foundation of more than $5.7 billion in cash and clear strategies that align with customers' needs to lower cost and complexities, Sun is well positioned to outserve its competitors over the long-term by delivering innovation, value and choice to customers."