Fitch has placed International Business Machines Corporation's (NYSE:IBM) ratings on Rating Watch Negative. The following ratings are affected:
--Issuer Default Rating (IDR) at 'AA-';
--Senior unsecured credit facility at 'AA-';
--Senior unsecured debt at 'AA-';
--Commercial paper (CP) program at 'F1+'.
In addition, IBM International Finance N.V.'s IDR and CP program ratings of 'AA-' and 'F1+,' respectively, are placed on Rating Watch Negative.
Approximately $34.0 billion of debt is affected by Fitch's action, including IBM's nearly undrawn $10 billion credit facility.
The Rating Watch Negative reflects IBM's announcement today that it has received Board of Directors authorization to purchase up to $15 billion of common stock in addition to $1.4 billion remaining from prior authorizations. IBM stated that it may complete a significant portion of the repurchases over the next several months and a substantial amount will be debt-financed. In addition, IBM stated in the announcement that it will maintain increased financial leverage going forward. IBM also increased its annual dividend by 33% to approximately $2.2 billion annually.
Fitch expects to meet with IBM management to discuss financing plans associated with the aforementioned stock repurchases, the timing of the stock buybacks, and any permanent changes in financial policies associated with maintaining increased financial leverage. While Fitch believes IBM has financial flexibility within its current ratings to absorb some debt-financed stock repurchases, the level of debt associated with the stock repurchases along with the financial strategy for stock buybacks in 2008 and beyond will be key in the evaluation of IBM's ratings. Any negative rating actions will most likely be limited to one notch in the near term, contingent on the concerns previously mentioned. Fitch expects to resolve the Rating Watch Negative over the next few weeks.
IBM historically has pursued an aggressive share repurchase program funded primarily with free cash flow. For 2006, the company's gross stock repurchases totaled approximately $8.0 billion; historically, the company's annual gross stock repurchases have been in excess of $6 billion. Execution of today's stock buyback announcement would more than double historical activity. In addition, Fitch believes acquisitions, along with dividend increases, will continue to be significant uses of cash for IBM.
IBM currently has strong financial flexibility and liquidity supported by a significant cash position and consistent free cash flow, solid balance sheet despite significant debt funding requirements for the financing business, and substantial recurring revenue from services, software and financing businesses. Furthermore, IBM is well diversified from a geographic and product perspective, offering a full range of computer hardware, information technology (IT) services, software, and financing worldwide. IBM's diversity and degree of recurring revenue, which Fitch estimates accounts for more than 50% of total revenues, historically have mitigated the financial impact from volatility in IT end market demand. Also, Fitch recognizes IBM Global Financing's (IGF) solid long-term operating record and strategic advantages it provides in attracting and retaining customers by delivering total solutions to IBM's customers as well as the annuity-like revenue stream associated with multi-year leases.
At the end of the first quarter of 2007 ended March 31, 2007, IBM had $24.0 billion of total debt of which $23.2 billion, or approximately 97%, supported IGF's end-user and business-partner financing operations with the remaining $746 million of debt supporting IBM's core operations. IBM's core leverage (core debt to core operating EBITDA) was negligible as of March 31, 2007, at approximately 0.1 times (x). Core interest coverage (core operating EBITDA to core interest expense) remained strong at nearly 70x. Total leverage (total gross debt to total operating EBITDA) as of March 31, 2007 was approximately 1.3x. Total interest coverage for the LTM ended March 31, 2007 remained solid at 18x.
IBM's liquidity remains strong with nearly $11 billion in cash and marketable securities as of March 31, 2007, a nearly undrawn five-year $10 billion credit facility expiring on June 28, 2011 and a $500 million committed trade receivables securitization facility that renews annually. Furthermore, IBM continues to achieve significant and consistent free cash flow, which averaged approximately $6 billion annually over the last five years, excluding the cash flow effects from IGF finance receivables. The company's CP balance at the end of the first quarter of 2007 was approximately $4.6 billion and approximately $2.8 billion of long-term debt matures in 2007.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.
