S&P Downgrades Unisys Corp. (UIS) to 'B+'; Outlook Negative

Standard & Poor's Ratings Services said it lowered its corporate credit rating on Unisys Corp. (NYSE: UIS) to 'B+' from 'BB-'. The outlook is negative.

At the same time, we assigned our 'BB' issue-level rating and '1' recovery rating to the company's new $350 million of senior secured notes. We also raised the issue-level rating on the company's existing senior unsecured notes to 'BB' from 'BB-' and revised the recovery rating on this debt to '1' from '4'. The '1' recovery rating indicates our expectation for very high (90%-100%) recovery in the event of payment default.

"Our downgrade of Unisys reflects our expectation that the company's new debt issuance and restructuring expenses will preclude the firm from lowering its Standard & Poor's-adjusted leverage to less than 5x during the next 24 months, in spite of planned operating cost reductions," said Standard & Poor's credit analyst James Thomas.

Although the additional borrowing will enhance the firm's liquidity position, we believe that the increase in debt and interest coverage burden will weaken the firm's financial risk profile, for which we revised our assessment to "aggressive" from "significant," as defined in our criteria.

Our rating on Unisys incorporates its "weak" business risk profile, reflecting our view of the company's second-tier position in the global information technology (IT) services market, the highly competitive conditions in the IT services industry, and the volatile earnings from the firm's technology hardware business. Unisys' significant base of contractually recurring service revenues partly offsets these factors. Our "aggressive" financial risk profile assessment on Unisys reflects our expectations that the company's EBITDA interest coverage will exceed 3x in the coming year and that it will be challenging for the firm to reduce its debt to EBITDA to less than 5x during the next 24 months despite its plans for expense reductions.

We base our negative outlook on Unisys on our expectation that it will be challenging for the company to generate free cash flow as a result of high restructuring charges and weakened margins in a highly competitive IT services environment.

We would consider a downgrade if Unisys is unable to make headway in its cost reduction plans as a result of regulatory or other challenges and if free cash flow turns persistently negative.

We would consider revising the outlook to stable if Unisys is able to demonstrate progress in reducing operating expenses and assumes a trajectory to raise its adjusted free cash flow to debt ratio over 5%.

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