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Fitch Rates Hewlett-Packard's Senior Unsecured Note Offering 'A-'; Outlook Stable

Fitch Ratings has assigned an 'A-' rating to Hewlett-Packard Company's (HP) proposed offering of senior unsecured notes. Net proceeds from the offering will be used for general corporate purposes. The Rating Outlook is Stable.

KEY RATING DRIVERS

The ratings and Stable Outlook reflect HP's:

--Strong core credit metrics, with core (non-financing) leverage (core debt/ core operating EBITDA) of 0.9x as of Oct. 31, 2013 compared with 1.1x in the prior year as significant debt reduction more than offset revenue and profitability pressures. Core interest coverage (core EBITDA/ core interest expense) remains solid at 31x compared with 27x in the year ago period.

Fitch forecasts core leverage will remain below 1x through fiscal 2016 reflecting revenue stabilization, modest EBITDA margin expansion due to restructuring activities and positive revenue mix, and marginal incremental debt reduction.

--Strong liquidity and free cash flow (FCF), consisting of $12.2 billion of cash (primarily offshore), $7.5 billion of undrawn committed credit facility capacity and annual FCF (post dividends) typically in excess of $5 billion.

--Significant scale and broad portfolio, which provides purchasing leverage for shared components and strengthens the resiliency of its total revenue.

--Strong worldwide market share, including leading unit market share in servers and printers and second largest share in PCs, IT services and networking.

--Significant recurring revenue (33% of total revenue) primarily via printer supplies, outsourcing and technology services, and software maintenance.

--Geographically diversified revenue base with approximately 66% of revenue derived from outside the U.S.

Rating concerns include:

--Operating margin compression in HP's Enterprise Group due to pricing pressures and adverse revenue mix in industry standard servers (ISS), and declines in traditional storage products (tape and EVA SAN), partially offset by new converged storage products (3PAR StoreServ, StoreOnce and StoreAll).

--Continued secular decline in high margin business critical systems (BCS) revenue, which declined 26% in the latest 12 months (LTM) ended Oct. 31, 2013. HP's technology services revenue and operating margin is also adversely affected as customers gradually migrate to UNIX servers offered by competitors (IBM and Oracle) or x86 servers that have lower attach rates and less profitable support contracts.

--Potential long-term hardware revenue and profitability pressures if commercial customers aggressively adopt cloud computing and the market for cloud services is highly concentrated. In this scenario, cloud providers would have significant pricing leverage due to scale and/or could accelerate their utilization of unbranded custom-built servers.

--Aggressive pricing and weak global demand for PCs due to cyclical factors affecting the commercial PC business and secular factors in terms of tablet or smartphone substitution adversely affecting consumer PC demand. This risk is muted by the low profit contribution of HP's PC business, which Fitch estimates at 8%-9% of total segment operating profit, despite accounting for 28% of total revenue.

RATING SENSITIVITIES

The ratings may be upgraded in the event of:

--Strong revenue growth and expanding margins for the Enterprise Group, which provides greater diversity to the company's operating income mix. Printing accounted for 36% of total segment operating profit in the LTM ended Oct. 31, 2013 compared with approximately 28% in the prior three years.

--Material revenue shift towards software provides margin expansion and greater recurring revenue through subscriptions or maintenance.

The ratings may be downgraded in the event of:

--Continued long-term market share losses in industry standard servers, indicating lackluster demand for HP's new Moonshot servers.

--Significant decline in supplies demand, particularly commercial, which is not offset by growth in other HP segments.

--The company divests any businesses that results in material dis-synergies or EBITDA deterioration.

In addition to its solid cash position and consistent FCF, HP's liquidity is further supported by two undrawn revolving credit facilities, which had aggregate capacity of $7.5 billion as of Oct. 31, 2013, and multiple revolving trade receivables facilities with $838 million of available capacity as of July 31, 2013 (latest date available). HP's revolving credit facilities consist of a $4.5 billion credit facility expiring in February 2015 and a $3 billion facility expiring in May 2017. Minimum interest coverage of 3x is the sole financial covenant.

Total debt was $22.6 billion as of Oct. 31, 2013, consisting of short-term debt of nearly $6 billion, primarily current portion of long-term debt, and long-term debt of $16.6 billion. Fitch estimates approximately $10.9 billion, or 48% of total debt, is attributable to HP's customer-financing business.

Fitch currently rates HP and its wholly owned subsidiaries as follows:

HP

--Long-term Issuer Default Rating (IDR) at 'A-';

--Short-term IDR at 'F2';

--Senior credit facilities at 'A-';

--Senior unsecured debt at 'A-';

--Commercial paper (CP) at 'F2'.

Hewlett-Packard International Bank PLC

--Short-term IDR at 'F2';

--CP 'at F2'.

Electronic Data Systems LLC

--Long-term IDR at 'A-';

--Senior unsecured debt at 'A-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=813933

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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