Investors view HP as a growing risk

Hewlett-Packard Co's credit may still be overrated, even after ratings downgrades in the past year, as the maker of technology equipment adds debt while profitability wanes. Credit-default swaps on the company, which was cut last year to A3 by Moody's Investors Service, to A by Fitch Ratings and to BBB+ by Standard & Poor's, soared to 147 basis points on Friday from 97 basis points at the end of February, data compiled by Bloomberg show. That means derivatives traders are treating Hewlett-Packard as if it were rated Baa2, two levels above junk, according to Moody's Analytics. Investors view the Palo Alto, California-based manufacturer as getting increasingly risky as Meg Whitman, the third chief executive officer in two years, tries to turn around its struggling computer and printer businesses. While Whitman said she intends to rebuild Hewlett-Packard's balance sheet, leverage more than doubled since 2010, according to CreditSights Inc. "I believe both Moody's and Fitch will downgrade them into BBB+," Ping Zhao, an analyst at CreditSights, a debt research firm in New York, said in a tele-phone interview. "HP has problems they won't be able to fix in the next year or two." Hewlett-Packard's long-term debt climbed to $25.5 billion on January 31 from $14 billion two years earlier. Its ratio of net debt to earnings before interest, taxes, depreciation and amortisation climbed to 1.5 times, from 0.6 times in 2010, Zhao wrote in a report in March. That makes it the most leveraged of its peers, Bloomberg data show. The increase in credit-default swap prices means that it now costs $147,000 a year to insure against losses on $10 million of Hewlett-Packard's bonds for five years. That's five times as much as the $28,400 it would cost to insure the same amount of International Business Machines Corp. debt. "In the mid-term, we really want to focus on building back our balance sheet," Whitman told analysts on a conference call in November. "We have significantly more debt." Hewlett-Packard is seeking to recover from the departures of former CEO Leo Apotheker in September and Mark Hurd the prior year. Whitman, who took over on September 22, has said she plans to eschew large acquisitions this year and avoid "drama." She also said buybacks and dividends will continue to be a "core part" of Hewlett-Packard's strategy. It will take about two years for the company to get back to its debt levels from before the $10 billion purchase of software company Autonomy Corp in 2011, Catherine Lesjak, its chief financial officer, said in February. "The recent Autonomy acquisition brought in a lot of debt to the company," Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said. "Now that Meg Whitman has come on, they're thinking more about balancing between shareholders and bondholders." Hewlett-Packard bought back about $780 million of stock in the quarter ended January 31, regulatory filings show. It spent $10.1 billion on share repurchases and $10.5 billion of net cash on acquisitions in the 2011 fiscal year, which ended in October, according to its annual report. That didn't stop its stock from falling 39 per cent in the past year to $24.74 as of April 27. "From HP's perspective, I can see why they want to buy back shares," Zhao said. "But to me that makes no sense if you said you're going to rebuild your balance sheet."