Capgemini debt rating cut to junk status

7th January 2005, Comments 0 comments

PARIS, Jan 7 (AFP) - International credit rating agency Standard and Poor's said Friday it had cut its rating on the debt of French information technology services group Capgemini to junk status.

PARIS, Jan 7 (AFP) - International credit rating agency Standard and Poor's said Friday it had cut its rating on the debt of French information technology services group Capgemini to junk status.

The decision raised protest from the company and caused a 6.5 percent drop in its shares shortly after the stock market opened here.

By mid morning, the company's shares had reduced their losses to 2.11 percent at EUR 23.17.

Earlier, S and P said it had trimmed its rating on Capgemini's debt to BB plus, marking junk status, from its previous rating of BBB minus, the lowest notch before junk status.

Many investment funds have mandates not to buy bonds or other debt instruments issued by companies or governments with a junk status credit rating. As a result, the debtor has to offer higher interest rates to attract investors to its debt.

"The downgrade reflects our expectations that Capgemini's margins will not rise quickly enough to sustain the previous rating," said S and P credit analyst Patrice Cochelin in a statement.

Protesting the decision, the company lashed back, saying it was in good financial health.

"Capgemini expresses its strong disagreement with this opinion, given that during its discussions with Standard and Poors, it had shown evidence of the operating performance improvement witnessed in the last months as well as of its sound capital structure," it said in a statement.

The company's finance director Nicolas Dufourcq told AFP that the impact of the decision impact would be "minimal."

S and P raised concerns that although it expected the company's profit margin to exceed three percent this year after an estimated one percent last year, it would still fall short of rivals' margins in excess of five percent.

In reaction to those concerns, the company said that earlier forecasts for an operating margin of two percent in the second half of 2004 would be met and that it was "confident that 2005 will show an acceleration in margin improvement".

However, S and P was more sanguine about the company's outlook, warning a further downgrade could be in store.

"The ratings could be lowered again by one notch if the company's liquidity, which currently is good, weakens materially," S and P said.

The company said in return that it had EUR 350 million (USD 462 million) of cash on hand at the end of 2004.

Duforcq dismissed specific concerns from S and P about the company's US business, saying "Our priority in 2005 will be improving the margin in the United States. We've had very nice commercial success there at the end of 2004 and we are making progress."

© AFP

Subject: French News

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