Makers of computer hardware, suffering from declining profit margins in a weak business climate, saw their credit ratings tumble last week.
Rating agencies slashed ratings on International Business Machines Corp., Hewlett-Packard Co. and Apple Computer Inc.
IBM, with $28 billion in outstanding debt, was the the largest computer issuer downgraded. Moody's Investors Service dropped senior long-term ratings on IBM and its subsidiaries to A3 from A1. Short-term ratings fell to Prime-2 from Prime-1.
Moody's also cut Hewlett-Packard's senior long-term ratings to Aa2 from Aa1. The company, a leading manufacturer of computer printers and other products, is still the highest rated computer hardware company, Moody's analysts said.
Standard & Poor's dropped ratings on Apple's proposed long-term debt offering to A-minus from A. In May, Apple notified the Securities and Exchange Commission that it planned to issue up to $500 million of debt, the company's first foray into the long-term bond market.
Standard & Poor's also cut its rating on Apple's outstanding commercial paper to A-2 from A- 1.
The ratings agencies noted that all three of the companies are being hurt by increased price competition for computer products.
IBM is also suffering from changes in the make-up of its sales. Moody's analysts noted that "IBM's operating results and debtholder protection protection measures will be under pressure for the intermediate term as the company seeks to remake itself into a more nimble, customer-focused competitor."
IBM has already taken large write-offs, totaling $28 billion over the past six years, to account for losses, layoffs and corporate restructuring. IBM's $8.9 billion write-off announced last month was one of the largest in U.S. corporate history.
"We're working hard to ensure that we have the results to get the rating back up in the future," David Harrah, an IBM spokesman, said.
Earlier this month, Standard & Poor's downgraded IBM to A with a negative outlook.
At Hewlett-Packard, Moody's downgrade covers the company's outstanding long-term debt of $350 million and 100 million pounds sterling.
"The combination of industry-wide intense pricing competition shortening product cycles, and Hewlett-Packard's strategic shift toward lower-margined PCs and workstations will continue to pressure the company's gross and operating margins," Moody's analysts said.
An official at the company denied that Hewlett-Packard has made a such "strategic shift."
"Those are very important businesses to us, but there is not a strategic shift. They are a small percentage of our total sales that has grown," the official said.
And the lower profit margins on smaller computers will not necessarily translate directly to the company's bottom line, the official said.
"Although those areas may have lower gross margins, that's not the same as lower net margins or operating margins. Our printer business has low gross margins but good net margins," the official said.
Gross profit measures the straightforward difference between the cost of producing an item and the amount it is sold for. Net and operating profits take into account other costs related to a product such as selling and administrative expenses.
To justify keeping Hewlett-Packard's ratings at the fairly well-regarded double-A level, Moody's analysts said they expected the company would continue to have "an exceptionally strong and liquid balance sheet" and would continue to produce quality products.
Standard & Poor's recently affirmed its AA-plus rating on Hewlitt-Packard with a stable outlook.
Apple's balance sheet is suffering from frequent price cuts that have reduced the company's once rich profit margins. Apple took a write-off of $321 million in its last fiscal quarter to account for layoffs and restructuring.
And the company does not yet have major sales from new products like the Newton and the PowerPC to offset declines in its maturing product lines, like the Macintosh.
"Apple faces a major business evolution from a proprietary product platform to the open-environment PowerPC, and the launch of its non-PC business initiatives, which increase the uncertainty of Apple's growth and profitability prospects," S&P's analysts said.
Apple officials declined to comment.
A source familiar with the company noted that Apple still has almost $1 billion in cash and looks forward to growth from the new products. The company will not abandon its plan to issue long-term debt for the first time, despite the downgrade, the source said.
Apple currently has $200 million to $300 million of short-term commercial paper outstanding, the source said.
Moody's rates the prospective Apple debt issue A2.
In secondary market trading on Friday, quotations on IBM's bonds widened 10 to 20 basis points, traders said. Hewlett-Packard's bonds are thinly traded and no quotes were available, traders said.
The overall market for investment grade bonds was up Friday and spreads tightened slightly after widening Thursday. Below-investment grade bonds were mixed in quiet trading. Bonds of Dr. Pepper were up. The company's zero-coupon bonds due in 1997 were quoted at 74, up 1, traders said.
In the primary market, new issues are expected this week from Forest Oil Corp., Kash 'N Karry Inc. and Rohr Inc., market participants said.
The Federal National Mortgage Association sold $662 million of conduit mortgage securities. The securities are backed by FNMA 6.50% mortgage securities with a 30-year maturity that have an average weighted maturity just under 30 years and a weighted average coupon of 7.125%. Bear, Stearns & Co. managed the issue.
In a separate transaction, FNMA sold $500 million of real estate conduit mortgage securities managed by PaineWebber that are backed by securities similar to those backing the larger deal.
Also, FNMA sold $461 million of mortgage conduit securities managed by Kidder Peabody & Co. The securities are backed by FNMA 6.50% mortgage securities that have an average weighted maturity of just under 15 years and an average weighted coupon of 7.1%.
And using similar collateral, FNMA sold $300 million of conduit mortgage securities managed by Salomon Brothers.
The Federal Home Loan Mortgage Corp. sold $500 million of stripped mortgage-backed securities managed by Prudential Securities. The securities are backed by FHLM securities with a 30-year maturity and a weighted average coupon of 7.50%.
Sweetheart Cup Co. sold a $300 million two-part issue, managed by Donaldson, Lufkin & Jenrette Securities. The first part consisted of $190 million of 9 5/8% senior notes due in 2000 and noncallable for four years. The notes were priced at par to yield 9.625%.
The second part consisted of $110 million of 10 1/2% senior subordinated notes due in 2003 and noncallable for five years. The notes were priced at par to yield 10.50%. Sweetheart is rated B-minus by Standard & Poor's and B2 by Moody's.
Michigan Consolidated Gas Co. sold a $100 million, two-part offering managed by Merrill Lynch & Co. The first part consisted of $60 million of 5 3/4% amortizing first mortgage bonds due in 2001. The noncallable bonds were priced at par to yield 5.75%, or 50 basis points more than comparable Treasuries.
The second part consisted of $40 million of 7% first mortgage bonds due in 2025. The bonds, noncallable for 10 years, were priced at 98.76 to yield 7.10%, or 90 basis points more than comparable Treasury securities.
Louisville Gas & Electric Co. issued $40 million of 6% first mortgage notes due in 2003 and managed by Morgan Stanley & Co. The noncallable notes were priced at par to yield 6.00%, a spread of 37 basis points.