Moody's puts H-P on review

Moody's Investors Service put Hewlett-Packard Co. on review for downgrade including its senior unsecured debt at A2 and its short term rating at Prime-1.

Moody's said the action follows the Delaware Chancery Court decision which validated the recent shareholder vote that approved the merger of HP and Compaq Computer Corp.

Moody's said the review will focus on operating performance and outlook of the merged businesses, along with the integration plans and the execution risks surrounding the merger, which Moody's expects will be significant.

The rating agency will also review the combined company's financial position, which is expected to remain well capitalized and liquid, as well as the level of financial support that might accrue to the benefit of current Compaq bondholders. To the extent that Compaq debt is guaranteed by HP, the respective ratings would be equivalent. To the extent a guarantee is not provided, there would likely be a one notch differential in the respective long term ratings, Moody's said.

S&P takes H-P off watch

Standard & Poor's removed Hewlett-Packard Co. from CreditWatch with negative implications and confirmed its ratings including its $1.8 billion zero coupon LYONs due 2017 at BBB+ and notes at A-. The outlook is negative.

S&P said the action reflects its expectation that the acquisition of Compaq Computer Corp. will be closed by May 7, 2002.

The ratings reflect the improved market position of the combined company and HP's strong financial profile for the rating, S&P said. However, these factors are partially offset by the heightened level of operational and strategic execution risk inherent in a merger of this size in the highly competitive and rapidly evolving technology market.

HP's EBITDA margin was 7.5% in fiscal 2001, down from historic levels in excess of 10%. Lower earnings have been largely driven by HP's computer hardware segments, which are currently break-even to unprofitable and operate in very challenging environments, S&P continued. While the merger offers the scale and market positions in hardware that could lead to greatly improved profitability, the execution risks are significant.

Moody's lowers TranSwitch

Moody's Investors Service downgraded TranSwitch Corp. including cutting its $114 million 4½% convertible senior notes due 2005 to B3 form B2. The outlook is negative.

Moody's said the downgrade reflects "the dramatic deterioration in sales" of TranSwitch's VLSI semiconductor devices, which are dedicated to telecommunications and data networking applications.

The severe retrenchment in capital investment directly and indirectly affecting the WAN (wide area network), accompanied by sizable customer inventories accumulated through FY2001Q1, has reduced TranSwitch's quarterly revenues to less than $5 million, or an annualized run-rate of approximately $20 million, well below the company's $114 million outstanding debt, Moody's noted.

Restructuring actions implemented during FY2001Q3 and F2001Q4 have enabled TranSwitch to pare its quarterly breakeven revenue rate to $30 million, but this business model remains substantially out of alignment with current sales, the rating agency said.

Moody's said it is concerned over the company's continued draw down of cash in the absence of end-market visibility and the prevailing belief that a recovery in information technology capital spending will be deferred until some time after an overall economic recovery is in evidence.

S&P upgrades Freeport-McMoRan

Standard & Poor's upgraded Freeport-McMoran Copper & Gold Inc. including lifting its corporate credit rating to B from CCC+.

S&P said the action reflects its reassessment of Freeport-McMoRan's exposure to the ongoing country risks of the Republic of Indonesia.

Although the risks in operating in Indonesia remain considerable, S&P said it now views the Indonesian political climate and operating risks for Freeport-McMoRan, as well as the risk of sovereign intervention with foreign debt servicing more favorably.

Concerns have diminished over possible reprisals against Freeport-McMoRan for its close dealings with the former Suharto regime. The central government is continuing to publicly support both the company and its Contract of Work with Freeport-McMoRan. The company still faces risks concerning separatist movement issues in West Papua as well as uncertainties as to whether the provincial government might seek an increased stake in the company's primary asset, the Grasberg copper and gold mine in West Papua.

S&P cuts DDi

Standard & Poor's downgraded DDi Corp. and maintained a negative outlook. Ratings affected include DDi's $300 million credit facility due 2003, cut to B from B+, its $100 million 5.25% convertible subordinated notes due 2008 and $100 million 6.25% convertible subordinated notes due 2007, both cut to CCC+ from B-, and Details Capital Corp.'s $60.054 million 12.5% senior discount notes due 2007, cut to CCC+ from B-.

S&P said the action follows DDi's announcement that it expects weaker profits due to a sharp drop in sales.

DDi's sales fell by more than one-half in its fiscal first quarter ended March 2002 from the same period in 2001, the company said. The decline resulted in subpar credit measures for its rating. Slumping end-market demand and increased pricing pressures have hurt operating performance, and management expects sales to remain depressed in the near term.

S&P said DDi's operating profitability fell well below its expectations to about 2% from nearly 30% in the same period in 2001.

Deteriorating cash flow protection measures are a concern as EBITDA coverage of interest is likely to be below 1 times in the first half of 2002, down from more than 5x in the first half of 2001, S&P added.

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