Digital Equipment Corp got a decidedly downbeat response from Standard & Poor’s Corp to its poor fiscal second quarter figures, and the agency stripped the company of its coveted A rating, cutting its rating on the senior debt to triple-B-plus from A-minus – triple-B is about the lowest investment grade rating and after that debt is either highly- or lowly-rated junk – or in default. It cut the commercial paper rating to A-2 from A-1, and the moves affect about $1,000m in debt. The outlook remains negative, and the downgrade reflects continuing losses for DEC through the first half of fiscal 1994, and greater uncertainty regarding the company’s performance. The rating agency said that although it did not expect DEC’s profitability to be restored to historical levels, the former rating did anticipate that the company would improve profitability along with a stabilisation of the revenue base over the near term. The current ratings reflect DEC’s good overall market position, a relatively stable and profitable service revenue base representing about half of sales, and a still strong capital structure. While DEC continues to realign its costs to better reflect the computer industry’s lower growth and lower-margin environment, the cash outflow associated with these efforts have reduced liquidity. DEC’s cash balances remain strong at $1,100m but have decreased from $1,600m at September 30. But DEC will be challenged to improve performance over the near term. It expects the company to post break-even results or a modest loss for the current fiscal year with improvement thereafter and warns darkly that continuing losses or additional material restructuring charges could prompt a further ratings downgrade.
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