Fitch Ratings Affirms Ratings of HP and EDS

Fitch Ratings has affirmed the ratings of Hewlett-Packard Company (HP) and Electronic Data Systems (EDS), a subsidiary whose debt is fully and unconditionally guaranteed by HP, as follows:

The Rating Outlook is Stable. Approximately $25 billion of debt is affected by Fitch's actions, including two undrawn, credit facilities with $6.4 billion of aggregate borrowing capacity.

Revenue pressures due to the global recession that has materially reduced demand for hardware, especially PCs and servers. Fitch estimates HP's total hardware revenue, including printer supplies, accounted for nearly 64 percent of total revenue and declined approximately 20 percent in the six months ended April 30. Excluding EDS, Fitch estimates HP's total revenue declined 15 percent-20 percent year-over-year in the six month period;

According to Fitch, HP has financial flexibility and liquidity due to $12.9 billion of cash and equivalents (primarily located offshore) as of April 30. Liquidity is further supported by FCF of approximately $8.6 billion for the latest 12 monthsended April 30. Fitch projects HP's FCF will decline in the mid-single digit range year-over-year in fiscal 2009 (ending Oct. 31) to approximately $10 billion due to hardware revenue pressures partially offset by the EDS acquisition and profit margin expansion from the company's restructuring initiatives. Liquidity is also supported by two undrawn revolving credit facilities, which have aggregate capacity of $6.4 billion as of May 2009, and multiple revolving trade receivables facilities with aggregate maximum capacity and availability of $537 million and $262 million, respectively, as of April 30. HP's revolving credit facilities consist of a $2.9 billion credit facility expiring in May 2012 and a $3.5 billion 364-day facility expiring in February 2010.

HP's credit facilities primarily serve as a backstop for the company's CP program, the capacity of which was increased to $16 billion from $10 billion in May 2008 to facilitate the acquisition of EDS. HP's aggregate credit facility capacity of $6.4 billion provides only 40 percent backup to the $16 billion CP program, well below the typical 100 percent backup required for an 'F1' CP rating. Nonetheless, Fitch assigns an 'F1' rating to HP's CP based on the company's strong total liquidity package, consisting of a sizable cash position and strong free cash flow, and expectations that total CP outstanding will not materially exceed the total capacity of the credit facility backstop. CP issuance well in excess of the total facility backstop of $6.4 billion and/or a material decline in liquidity would likely result in negative rating actions.

Total debt was approximately $18.7 billion as of April 30, consisting of approximately $2.7 billion of CP, $3 billion of other short-term debt, including current portion of long-term debt, and nearly $13 billion of long-term debt. Fitch estimates $7.5 billion, or 40 percent of total debt, is attributable to HP's customer-financing business. Long-term debt maturities for the remainder of calendar 2009 total nearly $2.5 billion and consist of $1 billion of floating rate global notes due in June, $750 million of floating rate global notes due in September and $700 of EDS notes due in October.

HP has more than sufficient liquidity to satisfy these obligations with cash, but Fitch believes HP is likely to refinance a portion of this debt in order to maintain a targeted debt/equity of 6.6 times (x) for the financing business. HP's core (non-financing) leverage (core debt / core EBITDA) increased to 0.7x as of April 30, from 0.1x in the prior year and core interest coverage declined to 72x from nearly 100x in the same period last year due to the EDS acquisition. Total leverage increased to 1.2x at April 30, from 0.6x in the prior year. Total interest coverage declined slightly to 28x from nearly 30x.

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