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NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has placed the following ratings for Computer Sciences Corp. (NYSE: CSC) on Rating Watch Negative:

--Long-term Issuer Default Rating (IDR) 'BBB+';

--Senior unsecured debt 'BBB+';

--Bank credit facility 'BBB+';

--Short-term IDR 'F2';

--Commercial paper (CP) 'F2'.

The Negative Watch reflects increased downside risk to Fitch's fiscal 2012 free cash flow (FCF) target of $500 million (post dividends) following the U.K. government's rejection of CSC's prior memorandum of understanding (MOU) with the National Health Service (NHS).

In addition, the outcome of further NHS contract negotiations expected in January 2012 could result in material reductions in contract scope and value compared to the prior MOU, profitability pressures, lower than expected FCF and a significant write-down of CSC's approximately $1.5 billion net investment in the contract as of Nov. 30, 2011.

Resolution of the Rating Watch will depend on additional clarity related to the NHS contract, the outcome of the ongoing SEC and Audit Committee investigations, and remediation of margin pressure in the Managed Services Sector segment due to challenging contracts. Fitch notes accounting adjustments to-date have been immaterial, but the scope of the investigation has expanded materially over the last few months beyond the initial Nordics region.

The existing ratings could be affirmed if the NHS contract, accounting investigation and MSS margin pressure are resolved favorably. If the NHS contract is terminated, substantial recovery of investments to date could also assist in affirming the existing ratings.

CSC's ratings have historically factored in the scalability of the company's business model. If the NHS project is ultimately terminated, Fitch believes the company has the flexibility to reduce headcount accordingly to mitigate profitability pressures. However, one-time cash outflows for severance payments could be material.

The recovery amount and timing of CSC's net investment is highly uncertain, particularly if the contract is terminated, which Fitch believes would likely lead to lengthy litigation.

Termination with cause or for convenience is a key determinant in the recoverability of CSC's investment, as the contract requires NHS to pay CSC up to $672 million if the contract is terminated for convenience at Sept. 30, 2011. The cap for the termination fee is based on a contractual formula and decreases monthly. However, NHS formally notified CSC on Feb. 4, 2011 that a missed key milestone constituted a breach of contract, thereby potentially providing the basis for termination with cause.

Fitch estimates CSC's valuation on an enterprise value (EV) to EBITDA basis to be just under 3 times (x). However, the company is less attractive to potential acquirers on FCF-based valuation metrics given CSC's relatively high capital intensity and recent greater volatility in FCF, well in excess of seasonal norms.

The $300 million of 5% senior unsecured notes due 2013 do not carry a change of control covenant, while the $700 million of 5.5% notes due 2013 and the $1 billion of 6.5% notes due 2018 both carry a change of control triggering event covenant. The triggering event occurs when two of the three rating agencies downgrade the rating on the unsecured notes and assign the notes a non-investment grade rating within 60 days following the consummation of a change of control.

Additional information is available at '[ www.fitchratings.com ]'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]

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