Computer Associates' debt downgraded to junk

A US credit ratings firm has downgraded Computer Associates International to junk status, citing intensifying industry...

A US credit ratings firm has downgraded Computer Associates International to junk status, citing intensifying industry competition and uncertainty associated with government investigations into past accounting.

The change is unlikely to affect CA's operations in the near future. For the past year, the company has focused on paying off its $2.3bn debt, and is not looking to borrow further. However, the downgrade does indicate the extent of some financiers' concerns about CA's stability.

Credit ratings firm Moody's Investors service began reviewing CA for a possible downgrade in October. Since then, CA has dismissed its chief financial officer and several other financial executives for alleged accounting improprieties, and received from the US Securities and Exchange Commission a "Wells Notice", which indicates that the agency is likely to bring a civil case against CA for violations.

Meanwhile, former senior vice president of finance Lloyd Silverstein pleaded guilty in January to charges of accounting fraud. Moody's cited those events in its report on its downgrade.

It also cited greater competition to CA from suppliers including Hewlett-Packard and IBM, which Moody's sees "weakening a more co-operative framework that historically existed".

Moody's said CA's alliance with Electronic Data Systems, which is weathering its own financial challenges amid a sharp drop in sales, is a risk factor, given the importance of the alliance to CA's product distribution strategy.

CA interim CFO Douglas Robinson said the downgrade ignores CA's underlying strength and strong future prospects, adding that the company has reduced its debt by $826m so far this financial year, which ends 31 March.

Against its debt, CA had $1.4bn in cash and liquid assets as of 31 December, along with $470m in untapped credit and close to $4bn in deferred revenue, Robinson claimed. 

Moody's acknowledged the company's deferred revenue backlog, its product development and improving corporate governance as positive factors, and that its revamped board of directors and key new executive hirings in the past two years are helping to strengthen the company.

Stacy Cowley writes for IDG News Service

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