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November 17, 1993

CREDIT QUALITY OF COMPUTER FIRMS IS DECLINING – S&P

By CBR Staff Writer

Standard & Poor’s Corp has been reviewing credit quality in the high-tech industry and doesn’t much like what it sees. It reports that the ratings of many of the biggest names have declined during the past year, Dow Jones & Co reports, and points out that the industry is suffering from its ongoing transition to a commodity business, open systems, price wars, and lower-margin client-servers from mainframes. As a result, its view of the business profile of the leading computer and component companies has changed over the year to incorporate a further element of riskiness. A sluggish economy, particularly in Europe, has exacerbated the problems. Since these secular changes in customer preferences are ongoing, the industry’s declining gross margins are expected to continue over the intermediate term. IBM Corp, Apple Computer Inc, Digital Equipment Corp, Storage Technology Corp and Cray Research Inc are among the companies with reduced credit quality during the past year, it says. It notes that over two-thirds of its ratings for the industry, 68%, are in the non-investment-grade category, only 32% are in the investment grades, and this year, the number of downgrades exceeded upgrades 13 to nine, while the amount of debt affected was substantially higher, $17,200m in downgrades, compared with $6,200m in upgrades. On its of negative to positive rating ratio, 2.4 to 1, these nasty trends will continue.

Sunk into the junk

Two-thirds of the firms with negative outlooks have implied ratings of Single-B or lower it says, and are concentrated in the computer and component industries. Those infamous so-called junk bonds are nothing like as exotic and arcane as many assume – they are simply debt issues that can command ratings no higher than single-B-plus or so, which means a lot of issues from computer companies have sunk into the junk category. The industry’s newer challenges, overlaid atop traditional high-tech risks of short product life cycles, dramatic changes in growth rates, high investment requirements and intense competition lead to significant earnings and cash flow volatility. However, with a permanently lower gross margin structure for most industry participants, there is less cushion against these risks than ever the ratings agency concluded.

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