Hewlett-Packard bonds, CDS trade at junk levels

Tue Nov 20, 2012 1:58pm EST

Nov 20 (IFR) - Hewlett-Packard Co bond spreads gapped out to levels that were wider than during the 2008 financial crisis on Tuesday after the company took a $5 billion charge and alleged a range of improprieties at a recent acquisition.

The company's bonds and credit default swaps were trading as if HP were a single B rated "junk" issuer, following its allegations of accounting irregularities at software company Autonomy, which it acquired last October for $11.1 billion.

The company's 4.65% 10-year bonds maturing in 2021 widened by 22 basis points (bp) to 355bp, according to Markit.

Its five-year CDS gapped out a whopping 55bp to 390bp during the most frenzied period of selling early in the session, as the shock of the writedown reverberated through the debt markets.

The CDS tightened back in by about 26bp by midday, but at 373bp, HP, rated A3/BBB+/A-, is still trading as if it were a B rated credit.

"This is more bad news in a name that has already suffered so much bad news," said a debt strategist at one of the large Wall Street firms. "People were actually thinking that Autonomy might be a bright spot on the horizon for the company going forward because it is more focused on enterprise services."

The writedown was a non-cash charge and does not directly add to HP's debt levels.

But bond investors were reeling from the announcement which could result in rating downgrades and higher refinancing costs if the company seeks to meet $10.95 billion of 2013 and 2014 debt maturities in the debt markets.

Moody's, which placed HP on review for downgrade in October, said the charge was a credit negative.

It "reflects poorly on HP's ability to effectively value key strategic acquisition opportunities and execute the acquired asset against valuation assumptions," Moody's said in a statement.

The Autonomy debacle follows HP's $8 billion writedown of goodwill related to its 2008 acquisition of Electronic Data Systems in the third quarter, said Moody's.

It also comes after a $1.2 billion writedown of intangibles related to the Compaq brand name, as well as last year's $885 million writedown of goodwill and intangibles arising from its purchase of Palm Inc.

"Aside from the charge related to Compaq, a transaction which occurred over a decade ago, HP has written off US$17.6bn, or nearly two thirds, of the goodwill and intangibles created from the EDS, Palm and Autonomy transactions," wrote Moody's.

Standard & Poor's was more sanguine, saying that its rating of BBB+ with a stable outlook would remain unchanged. HP's free operating cash flow generation of about $6.9 billion in fiscal 2012 slightly exceeded its expectations, said S&P.

"The noncash impairment charge does not alter our expectation that HP will maintain its "satisfactory" business profile and "intermediate" financial profile, despite highly competitive market conditions, expectations of a protracted operational turnaround, and near-term strategic execution risks," said S&P.

Fitch downgraded HP to A- with a stable outlook in October.

HP had $4 billion of debt coming due this year but has only raised $2 billion in the capital markets.

The company came to market in March with a $1.5 billion offer of 2.6% five-year notes that priced at 175bp over Treasuries and $500 million of 4.05% 10-year notes that priced at a spread of 210bp.

The five-year was last trading at 294bp over Treasuries, while the 10-year was at 335bp over Treasuries.

HP had $28.4 billion of total debt outstanding as of end October.

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