Fitch Affirms IBM's IDRs at 'A+/F1'; Outlook Stable

Fitch Ratings has affirmed the ratings of International Business Machines Corporation (IBM) and IBM International Group Capital LLC (IIGC), an indirect, wholly owned subsidiary whose debt is fully and unconditionally guaranteed by IBM, as follows:

IBM

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

--Senior unsecured revolving credit facility at 'A+';

--Senior unsecured debt at 'A+';

--Short-term IDR at 'F1';

--Commercial paper (CP) rating at 'F1'.

IIGC

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

--Senior unsecured debt at 'A+';

--Short-term IDR at 'F1';

--CP rating at 'F1'.

The Rating Outlook is Stable. Fitch's action affects approximately $42 billion of debt, including IBM's undrawn $10 billion credit facility.

The ratings and Outlook reflect IBM's:

--Strong company profile primarily supported by i) significant revenue market share in information technology (IT) services (#1), servers (#1), enterprise software (#1) and external storage (#2); ii) Solid recurring revenue (50%) from IT services, software and financing that mitigates revenue and profit volatility; and iii) Highly diversified revenue base by offering, customer, industry and geography (60%+ revenue outside U.S.).

--Exceptional financial flexibility due to i) robust internal liquidity with a significant cash position ($12 billion) and free cash flow (FCF) exceeding $11 billion since 2008; ii) solid external liquidity with an undrawn $10 billion RCF due 2016 and ready access to capital markets; iii) strong credit protection metrics; and iv) Roughly $26 billion of finance receivables (59% short-term and 62% considered investment grade).

--Well executed management strategy, including i) ability to identify early trends that present significant higher margin, long-term growth opportunities and reposition investment priorities, both organic and inorganic, to capitalize on these opportunities (i.e. analytics and growth markets); ii) consistent and sizable investments in R&D (6% of revenue) to develop innovative differentiated solutions that leverage IBM's entire portfolio of offerings and command higher profit margins (i.e. Smarter Planet); iii) core competency in identifying and integrating strategic acquisitions and iv) established track record of consistently meeting or exceeding financial forecasts.

Ratings concerns include:

--Risk of core debt (non-financing) increases to achieve financial and/or business objectives, such as sizable debt-financed share repurchases and/or acquisitions, resulting in a material reduction of credit protection measures. Fitch notes IBM has significant incremental debt capacity without adversely affecting its current credit ratings.

--Consistent, material increases in cash dividends long-term, which could pressure FCF and financial flexibility in the absence of commensurate growth in profitability. This could necessitate further increases in core debt to fund acquisitions and/or share repurchases.

--Long-term outlook for mainframe demand (system z) and associated operating system software (zOS) as industry standard servers become increasingly capable. This could potentially narrow the cost (i.e. total cost of ownership) and benefit differential to mainframes.

IBM has strong financial flexibility and liquidity supported by $12.3 billion of cash and equivalents as of March 31, 2012 and an undrawn $10 billion revolving credit facility expiring on Nov. 10, 2016. Liquidity is further supported by strong and consistent annual FCF (post-dividends) exceeding $11 billion since 2008.

Fitch expects IBM's FCF to be approximately $13 billion in 2012. This is primarily due to continued profit margin expansion, reflecting a more favorable revenue mix and continued cost discipline. Also a factor is modest top-line growth led by Smarter Planet solutions, business analytics, growth markets and cloud computing. Fitch expects IBM to continue to use FCF for acquisitions, particularly in the software and services industries, aggressive share repurchases and dividend payments to shareholders.