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
"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
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