Unisys Feeling Debt Stress

Yesterday, Unisys (UIS - Analyst Report) announced a commencement of its exchange offers for four sets of senior notes. The company also said that the previously announced offer to exchange a portion of the senior notes and its concurrent notes in a private placement has been terminated.

The company had earlier planned to exchange four sets of senior notes in a private placement for new senior secured notes. The company has debt maturity coming up in early 2010, and the management is now strongly focusing on cash flow generation. UIS initially announced the offering on April 30 expiring on May 28, but on May 29 extended the expiration date further to June 13.

On the latest earnings call, management stated that the company is exploring alternatives to address its capital structure, particularly the $300 million of notes that mature in 2010. The company already appears on S&P’s list of most distressed companies.

At the end of the first quarter, the company had a total debt of $1060.3 million and $468.7 million of cash and equivalents. UIS’s revolving credit agreement expired in May 2009 (the company did not borrow under this facility in 2008). The company used the letter of credit provision of the revolving credit agreement and had approximately $65 million of letters of credit outstanding as of December 31, 2008.

UIS cash-collateralized those letters at the end of the first quarter, in accordance with the agreement. Given the tight credit markets along with the company’s credit rating, UIS does not hope to renew or replace its existing revolving credit facility that expired in May 2009. Hence, the company plans to use the current cash on hand to meet near-term liquidity needs.

The new CEO is determined to make the organization lean and highly efficient with a clearly differentiated value proposition that customers recognize. Meanwhile, management is still engaged in a multi-pronged strategy of reducing the cost structure of the company and focusing its resources on high growth areas in the IT market.

The company hopes that it will now derive tangible results from its ongoing restructuring after several execution missteps in the past. The road ahead remains bumpy as the company has been posting losses for four consecutive years. It remains to be seen how the new CEO turns the company around.

IT spending by industry is expected to remain lackluster in the near future. UIS generated $5.2 billion in revenues in 2008 compared to $104 billion and $17 billion generated by its competitors IBM (IBM - Analyst Report) and CSC (CSC - Snapshot Report) respectively. Expanding the top-line amid such recessionary conditions is an uphill task.

The stock is currently trading at $1.51, and there is not much that we can recommend now except “wait and watch."