Computer Associates junked

Dan Wilchins and Wei Gu

NEW YORK: Moody's Investors Service have cut Computer Associates International's debt ratings by one notch to junk, citing government investigations into the software company's accounting, maturing debt and intensifying competition.

The Islandia, New York-based company said it "strongly disagrees" with the downgrade. "Our financial resources clearly are more than adequate," Computer Associates said in a statement.

Downgrades to junk often raise a company's borrowing costs substantially, because many investors are not permitted to buy the debt of non-investment-grade rated companies.

But Computer Associates' stock fell less than 3 percent. Investors believe that for now, the company has enough cash to meet its needs.

"I don't think the downgrade is meaningful to equity investors because the company is paying down debt as opposed to borrowing more money," said Janney Montgomery Scott analyst Richard Sherman.

In the next few months, this cut will likely have little impact on the company, said Philip Olesen, bond analyst at UBS in Stamford, Connecticut.

The company has no short-term debt to refinance, and had about $1.4 billion of cash and marketable securities on its balance sheet as of December, Olesen said.

The cut may hinder big acquisitions, but the company has not done a big deal in the past four years, and is in no rush to resume launching large acquisitions. Computer Associates bought a 30-employee software company on Thursday in all cash deal for an undisclosed amount.

The downgrade came two months after Computer Associates received a formal notice from the Securities and Exchange Commission, which indicates the government may take civil enforcement action soon.

Moody's cited uncertainty surrounding the long-running probe by the SEC and Department of Justice associated with a $1 billion accounting scandal, which reflects "a history of corporate governance concerns."

The rating agency said the uncertainty could hamper the company's refinancing of upcoming maturing debt, including $825 million of senior notes maturing in April 2005.

The company's free cash flow, a measure of the cash the company generates after paying dividends and replacing worn-out assets, was $1.1 billion in the last 12 months, representing a 5 percent decline over last year, Moody's said.

Moody's cut Computer Associates' senior unsecured debt ratings to Ba1, the highest junk rating, from Baa3, the lowest investment-grade rating. It lowered the company's short-term rating to "Not-prime" from "Prime-3." The outlook is stable, because Computer Associates has a substantial backlog of contracts and has improved its corporate governance, Moody's said.

Standard & Poor's Ratings Services rates the company's senior unsecured debt "BBB-plus," three notches above junk, although S&P has said it may cut the rating.

Computer Associates has about $2.3 billion of outstanding debt securities. Its notes with a 6.5 percent coupon, maturing in 2008, fell to 108.5 cents on the dollar, a decline of 1.5 cents on the dollar.

The price of insuring the company's debt against default in the credit derivatives market rose 0.25 percentage points to 1.30 percentage points, or $130,000 per year for every $10 million insured.

© Reuters