Computer
The computer-services manager for the U.S. government, probably wont be able to renew a $275 million credit line that expires May 31, according to a filing last month. The line is with banks led by Bank of America Corp. Unisys, which ended last year with $544 million in cash and has $300 million of debt due in March, said its reviewing options to pay off the notes.
“This is a busted company,” said Matt Eagan, a portfolio manager at Loomis Sayles & Co. in Boston. The firm sold its holdings of Unisys bonds in the fourth quarter on the assumption they wouldnt rebound, he said.
Sales at Unisys have fallen as customers switch to servers from the mainframe computers that were once its main business. The company now relies on services such as managing clients computer networks for more than 80 percent of sales, vying for contracts with International Business Machines Corp. and Affiliated Computer Services Inc.
Clients have cut spending in the worst economic slump in at least a quarter-century, leading to a 7.4 percent sales drop in 2008. Mounting mortgage delinquencies last year sparked a global credit freeze that has restricted access to cash. Unisys may have negative free cash flow this year, according to John Witt, a credit analyst at Fitch Ratings in New York.
Financing Options
Unisys had $62.1 million outstanding from the credit line at the end of last year. The Blue Bell, Pennsylvania-based company is exploring options to help it pay off the debt, including asset sales, refinancing and secured financing, said spokesman Jim Kerr. “This is a company of great assets,” he said.
Unisys sold more than $385 million in assets in the past three years, including its publishing software unit.
Chief Executive Officer Ed Coleman, who took the reins in October to spur a turnaround, has cut jobs to reduce expenses. Unisys said in December it would eliminate about 1,300 jobs, or 4.5 percent of the workforce, to save $225 million annually. The company trimmed the workforce by 7,200 last year.
Unisys debt is rated junk, or below investment grade, and has a negative outlook from Fitch, Moodys Corp. and Standard & Poors. Its borrowing costs are about 12 times those of Affiliated Computer and 48 times industry leader IBM, based on debt yields.
Perceived Risk Rising
Credit-default swaps that protect against a default by Unisys have jumped 9.7 percentage points this year to 60.5 percent upfront, according to London-based CMA DataVision. Thats in addition to 5 percent a year, meaning it would cost $6.05 million initially and $500,000 annually to protect $10 million of Unisys bonds for five years.
Fidelity Investments, among the largest holders of Unisys bonds, declined to comment, as did Bank of America spokeswoman Melissa Schilowitz. The bank doesnt talk about specific clients, she said.
The price of Unisys 6.875 percent notes due in 2010 is now 53 cents on the dollar, almost half the value of a year ago. The yield jumped to 95 percent from 9.3 percent.
That compares with 8 percent on Dallas-based Affiliated Computers 4.7 percent notes that mature next year and 2 percent for Armonk, New York-based IBMs 4.95 percent note due in 2011. Affiliated debt is rated two levels below investment grade while IBMs is investment grade.
Debt for Equity
Left with few options, the company may have to refinance at a more costly rate, said Joseph Vafi, an analyst with Jefferies & Co. in San Francisco.
An alternative would be to swap the 2010 debt for equity, said Eagan at Loomis Sayles.
“If they spent half their cash to take out that bond, at least it allows them to fight another day,” he said.