S&P wary of tech sector outlook

HP is just the latest high-tech company to receive a downward revision of its financial outlook by debt rating agency Standard & Poor's.

Dawn Kawamoto
Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
3 min read
Tech companies increasingly are facing the prospect of falling credit ratings in light of exposure to ailing Asian economies and, as a result, are finding it more difficult to raise money to do business.

Hewlett-Packard has become the latest tech company to receive a downward revision of its financial outlook by debt rating agency Standard & Poor's.

"The tech sector has gone down at least a full notch," said Bruce Hyman, director of technology ratings for S&P. "The average rating is lower than it was a year ago."

As a company's outlook or debt rating slips, it finds itself in the position of having to pay investors a higher interest rate when trying to entice them into buying its corporate debt, which includes notes and bonds.

"We have been watching substantial pressure on technology companies for quite some time, and it's been accelerating for over the past year," Hyman said.

The example of Hewlett-Packard is instructive. The PC giant's outlook was revised downward yesterday to "negative" from "stable," meaning that its strong credit rating potential could be changed by S&P in the near future. It's previous rating of "stable" indicated that S&P did not anticipate a rating change for at least the next three years.

Hewlett-Packard's long-term debt remains rated AA+, indicating that there is virtually no risk it will default on its interest payment or principal. But S&P apparently sensed that trouble is afoot for the company.

"HP has a strong rating. But given the global events, we were concerned that they won't be able to sustain their rating levels of the past. That is the reason for the outlook change," said Molly Toll-Reed, an S&P analyst. "There is nothing in [HP's] performance to date to pick out. It's just that, given the rating level they are at, we see more downside potential given what's going on out there."

Despite the revision, Hewlett-Packard does not expect its ability to attract buyers for its debt offerings to be hindered, said Steve Beitler, a spokesman for the company. He added that HP is one of the few tech companies that has such a high rating on its debt.

Other tech companies that recently have received a downward revision in their outlook ratings include chip equipment maker Applied Materials and device-maker Adaptec.

Last month, Adaptec, which maintains a BB+ debt rating, had its outlook revised to "negative" from "stable" by S&P.

"Adaptec's revision was from a combination of pressures from the high-end PC sector, as well as its own efforts to reorient its business," Hyman said. He noted that Adaptec was exploring the possibility of branching out in order to grow its business, but concluded that the company's strategy for doing so was cutting into its profitability.

In July, S&P lowered Applied Materials' outlook rating to "negative" from "stable," even as it maintained its BBB+ rating on its debt. The company, which has been struggling to overcome the effects of the economic crisis in Asia, announced plans last month to cut 15 percent of its worldwide workforce and reduce executive salaries by 10 percent amid falling revenues and profits.

Micron Technology is another tech company that is on S&P's credit watch, indicating that there is a substantial chance its outlook rating also will be changed in the near term. Micron Technology currently has a BB debt rating, and its outlook rating already is "negative."

"This is based on severe pricing pressure [Micron] faces and the costs associated with acquiring Texas Instrument's memory business," Hyman said.

He added that some companies in the technology sector are seeing upside despite the growing trend of downward revisions in financial outlook ratings. Software and services companies, he said, have seen far fewer changes to their S&P status than computer makers.

"A lot of the software and services companies have done well," he said. "Companies that are trying to solve the Year 2000 problem have done a lot of revamping of their systems?and companies that provide the software and services to help have done well."