25 June 2003 Services giant EDS has surprised investors by unveiling a larger than expected $1.1 billion bond offering, following a trading warning issued last week and a cut in its credit rating by both Moody’s and Standard &Poors.
At the same time, its European rival Cap Gemini Ernst &Young also unveiled similar plans for a bond issue.
EDS is planning to raise some $500 million in 10 year convertible bonds and $600 million in 20 year convertibles in a bid to stabilise cash flow and ensure that another downgrade in its credit rating does not trigger a new round of payments that it might struggle to meet.
Both credit rating agencies described EDS’s outlook as ‘negative’. Their downgrading of EDS’s prospects came on the back of a warning issued last week that profits and cash flow in the current year would be less than originally expected.
Last week, new CEO Michael Jordan unveiled his strategic priorities for reinvigorating the company. Jordan said that EDS would focus on three main areas:
- Develop its core outsourcing business;
- Invest in up-and-coming areas, particularly business process outsourcing (BPO); and,
- Improve liquidity
“We’re taking steps to position EDS as the services provider of choice for business leaders looking to extract the highest returns on IT investments,” said Jordan.
Jordan also pledged to “improve the cost competitiveness of its core outsourcing business”. However, he added that this drive would result in restructuring charges and asset write-downs of between $425 million and $475 million.
Like EDS, Cap Gemini is looking to improve its liquidity and guard against the risk of a credit downgrade triggering new debt repayments. The announcement closely followed a downgrade from Standard &Poors, which cut the outlook for the company from “stable” to “negative”.
Cap Gemini is looking to raise between €350 million and €400 million.