Fitch Rates HP's Senior Unsecured Note Offering 'A+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to Hewlett-Packard Company's (HP) offering of senior unsecured debt. The notes are expected to rank pari passu with all existing debt of the company. Net proceeds from the offering are expected to be used for general corporate purposes. The Rating Outlook is Stable.

HP's ratings continue to reflect:

--Solid credit protection measures for the 'A+' rating category, especially core (non-financing) metrics;
--Strong financial flexibility and liquidity primarily provided by approximately $14.7 billion of cash as of July 31, 2010 (primarily offshore) and consistent free cash flow (FCF) in excess of $5 billion annually in the last five fiscal years;
--Significant recurring revenue primarily via printer supplies, outsourcing and technology services, and software maintenance, which in aggregate typically accounts for one-third of total revenue;
--Broad product portfolio with strong worldwide market-share positions in printing (#1), personal computers (#1), enterprise systems (#2) and information technology (IT) services (#2);
--Extensive market coverage due to established multi-channel distribution model;
--Geographically diversified revenue base with 63% of revenue derived from outside the U.S.

Rating concerns include:

--Risk of debt-financed acquisitions and/or share repurchases.
--The sustainability of the recent rebound in demand for IT hardware amid signs of a slowing global economic recovery, especially consumers in mature geographic markets, such as the U.S. and U.K. Fitch believes this risk is partially mitigated by the age of the installed base in the enterprise market. Personal computers (PCs) and servers account for approximately 44% of HP's total revenue.
--Threat of longer-term cannibalization of traditional PC demand from desktop virtualization in the enterprise market and/or from a broadening array of PC form factors, such as tablets, particularly in the consumer market.
--The potential long-term threat to HP's highly profitable printer supplies business from remanufactured or counterfeit cartridges.

In addition to its significant cash position and consistent FCF, HP's liquidity is further supported by two undrawn revolving credit facilities, which have aggregate capacity of $6.5 billion as of July 31, 2010. HP's revolving credit facilities consist of a $3 billion credit facility expiring in May 2012 and a $3.5 billion 364-day facility expiring in February 2011.

HP's credit facilities primarily serve as a backstop for the company's commercial paper (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 $6.5 billion provides only 40% backup to the $16 billion CP program, well below the typical 100% 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 $6.5 billion and/or a material decline in liquidity would likely result in negative rating actions.

Total debt was $20 billion as of July 31, 2010. Fitch estimates $9.3 billion, or 46% of total debt, is attributable to HP's customer-financing business. Subsequent to repaying $1 billion of floating-rate notes in June 2010, HP has limited long-term debt maturities for the remainder of calendar 2010 followed by approximately $2 billion of maturities in 2011.

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 ratio of 7 times (x) for the financing business. Fitch estimates HP core (non-financing) leverage (core debt/core EBITDA) was approximately 0.8x as of July 31, 2010 and core interest coverage was in excess of 100x. Total leverage of 1.1x at July 31, 2010 was unchanged from the prior year. Total interest coverage increased to nearly 42x from approximately 25x.
Fitch currently rates HP and subsidiaries as follows:

HP
--Long-term Issuer Default Rating (IDR) 'A+';
--Senior credit facilities 'A+';
--Senior unsecured debt 'A+';
--Short-term IDR 'F1';
--CP 'F1'.

EDS
--Long-term IDR 'A+';
--Senior unsecured debt 'A+'.

Hewlett-Packard International Bank PLC's
--Short-term IDR 'F1'
--CP 'F1'.

Additional information is available at www.fitchratings.com.

Related Research:
--'Corporate Rating Methodology' (Aug. 13, 2010);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Nov. 24, 2009);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).

Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489006
Liquidity Considerations for Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666

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