Standard & Poor's Ratings Services last week dealt Sun Microsystems a blow by cutting its corporate credit rating to junk status.

In a research note, the credit rating company warned that Sun will have trouble boosting revenue in the near-term and that it faces tougher competition that ever before in the server market.

Word of the cut appeared to hurt Sun shares, during Friday's trading. After enjoying a recent run to more than $5 per share, Sun's stock dropped seven per cent on Friday to $4.80.

Sun has close to $1.3bn in outstanding debt but also boasts more than $5bn in cash.

The move was a surprise to some analysts who noted that Sun appears to have put the worst behind it.

"We're projecting them to show their first year-over-year revenue growth in the March quarter," Brent Bracelin, an analyst with Pacific Crest Securities, told the New York Times. "Sun certainly has several challenges ahead of it, but we're at the start of things getting better. They're in a better position now than they were last year at this time."

Still, Standard & Poors warned that Sun faces serious challenges in keeping its position as the leading Unix vendor.

"Sun Microsystems has a good but not leading position (based on all operating systems) in the highly competitive global server market, a relatively narrow revenue base - particularly in comparison to major competitors, and inconsistent profitability," S&P said. ®