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April 26, 1994

CREDIT RATINGS

By CBR Staff Writer

Digital Equipment Corp paid the price for its much worse than expected fiscal third quarter figures, with Moody’s Investors Service Inc cutting its credit ratings again. The senior unsecured long-term debt rating was cut to Baa3 from Baa2 leaving it just one notch above the junk bond category, the short term debt to Prime-3 from Prime-2 and the preferred stock to ba2 from ba1. Some $1,400m of long-term debt and preferred stock is affected. The company’s revenues and margins are expected to remain under heavy pressure for the intermediate term due to intense industry competition, unpredictable market demand for products based on the new Alpha AXP architecture and the shift in the revenue base to lower margin products and services, the ratings agency said. In an effort to realign its expense structure and capacity levels to declining revenues and steeply lower margins, DEC has taken some $3,000m in restructuring charges since 1990, the agency noted, adding that despite this, operating losses have continued because the company has been unable to reduce expenses fast enough to keep pace with declines in its revenues or the shift in its revenue mix to lower margin products. DEC’s productivity rate as measured by its revenue per employee remains one of the industry’s lowest, driving management’s decision to take another restructuring charge sometime in its fourth quarter. Moody’s expects that future cash restructuring costs will require more borrowings to complete and, therefore, debtholder protection measures will weaken as a result; its ratings are therefore expected to remain under pressure because Moody’s believes that it will be hard for it to demonstrate stability in its operating results over the near- to intermediate term, Moody’s concluded gloomily.

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