The rating agency, Fitch Ratings, upgraded the debt ratings of UnisysCorporation (UIS) based on the company’s initiative of debt prepayment from the issue proceeds of mandatory convertible preferred stock.
Fitch Ratings now raised the company’s Issuer Default Rating (IDR) by one notch to “BB-” from “B+”. This denotes that Unisys’ debt is speculative and is prone to elevated default risk compared with the previous rating which implied that the debt carries material default risk.
However, the company is still three steps behind the investment grade domain, starting from BBB.
Unisys' secured credit facility rating was raised to “BB-” from “B+/RR4”, while its senior secured notes and second lien senior secured notes rating of “BB+” was affirmed by Fitch Ratings. Further, the rating agency maintained a stable outlook on the company.
In addition, the rating agency observes that the rise in cloud computing bodes well for Unisys, as it manages data centers and computer servers.
As of March 31, 2011, the company’s long-term debt was $618.5 million, down $204.7 million from the previous year end. During the first quarter, Unisys issued mandatory convertible preferred stock, and used the proceeds to redeem approximately $211 million of senior secured notes.
In April 2011, Unisys purchased senior secured notes due 2014 and 2015 of principal amount of $178.9 million. As a consequence, the company expects to decrease annual interest expense by $53 million. Moreover, Unisys plans to reduce 75% of the debt outstanding on September 2010 by the end of 2013.
We believe that Unisys has recently been restructuring its businesses to improve profitability. This restructuring initiative includes cutting jobs to reduce costs, selling non-core businesses, revamping its sales strategy and focusing investments on a few higher-growth areas such as outsourcing.
Of late, a few agencies have upgraded their ratings on Unisys in the wake of reduced debt and improved operating performance. Standard & Poor's Ratings Services recently upgraded its corporate credit rating on Unisys, driven by improved operating performance.
We currently have a long-term Outperform recommendation on Unisys.
However, the company reported a net loss (excluding a charge of $31.8 million related to debt reduction) of 21 cents per share in the first quarter of fiscal 2011, wider than the Zacks Consensus Estimate for a loss of 10 cents.
Thus, we have a Zacks #5 Rank, which translates into a short-term Strong Sell rating.
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