Fitch Affirms IBM's IDR at 'A+'; Outlook Stable.

NEW YORK -- 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 Issuer Default Rating (IDR) at 'A+';

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

--Senior unsecured debt at 'A+';

--Short-term IDR at 'F1'; and

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

IIGC:

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

--Senior unsecured debt at 'A+';

--Short-term IDR at 'F1'; and

--CP paper rating of 'F1'.

The Rating Outlook is Stable. Fitch's action affects approximately $41 billion of debt, including the company's undrawn $10 billion credit facility.

The ratings and Outlook reflect IBM's:

--Solid credit protection measures for the 'A+' rating category, especially core (non-financing) metrics;

--Significant liquidity supported by a solid cash position and strong and consistent free cash flow;

--Considerable recurring revenue from information technology (IT) services, software and financing, which in aggregate account for approximately 50% of total revenue and partially mitigate revenue and profit volatility;

--Highly diverse customer base from both an industry and geographic perspective;

--Breadth and quality of product and service offerings, resulting in leading market share in IT services, middleware software, servers and number two share of the total disk storage market.

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;

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

--Increase in legally mandated cash pension contributions to IBM's worldwide defined benefit (DB) pension plan due to negative double-digit investment returns on pension assets in 2008 amid weak financial markets.

IBM's total credit protection measures improved in the latest 12 months (LTM) ended March 31, 2009 due to an 11% decline in financing-related debt as the weak economic environment pressured new financing originations for hardware, a nearly 15% decline in core debt and a lower interest rate environment. Fitch estimates total leverage (total debt/ operating EBITDA) declined to 1.4 times (x) at March 31, 2009 from 1.7x in the prior year. Total interest coverage (operating EBITDA/ gross interest expense) improved to nearly 16x from approximately 14x. In the year ended March 31, 2009, core leverage (core debt/ core EBITDA) remained flat at 0.4x and core interest coverage improved slightly to 34x from nearly 29x due to lower interest rates. Fitch does not anticipate material changes in either core or total credit protection measures in the near term.

IBM has superior financial flexibility and liquidity as of March 31, 2009 supported by $12.3 billion of cash and equivalents, including $8.2 billion located in the U.S., and an undrawn $10 billion revolving credit facility, which expires on June 28, 2012. Liquidity is further supported by strong and consistent free cash flow (post-dividends), which increased to $11.9 billion for the LTM ended March 31, 2009 from nearly $9.5 billion in the corresponding year ago period. Despite the global recession that has adversely affected IT spending, especially for discretion hardware and project-based consulting & systems integration engagements, Fitch expects IBM's free cash flow to exceed $10 billion in 2009 due primarily to continued profit margin expansion, reflecting a favorable revenue mix and continued cost discipline.

Fitch expects IBM to continue to use free cash flow to aggressively repurchase shares, pursue acquisitions to further strengthen its position in the software and services industries and pay cash dividends to shareholders. Although IBM's worldwide DB plan was underfunded by $12.8 billion at year-end 2008 compared with overfunding of nearly $9 billion at year-end 2007, Fitch believes the company has more than ample liquidity to satisfy the total legally mandated pension funding requirements, estimated at approximately $5.6 billion through 2013, including a 10% increase in 2009 to $1 billion. Furthermore, Fitch notes the estimated total mandated pension contribution for the next five years is 23% lower than IBM's actual contributions of $7.3 billion in the prior five-years ended 2008, but will be greater on an annual basis relative to recent contributions in 2007 ($503 million) and 2008 ($917 million). Depending on financial market conditions in 2009, the amount of legally mandated minimum contributions could increase due to more frequent remeasurement of funded status in certain non-U.S. countries.

Total debt was nearly $31 billion as of March 31, 2009, consisting of approximately $9.9 billion of short-term debt, including $837 million of CP, and $21.1 billion of long-term debt. Fitch estimates $23.4 billion, or 75%, of total debt is attributable to IBM's global financing business with the remaining debt attributable to core (non-financing) operations. IBM has significant upcoming long-term debt maturities in the next 12 months totaling $7.4 billion, the overwhelming majority occurring in 2009. Fitch believes IBM will refinance the vast majority of the upcoming debt maturities in order to maintain a targeted debt/equity ratio of approximately 7x for the financing business and maintain a permanent amount of core debt in the capital structure.

For the purpose of financial evaluation, Fitch analyzes IBM's core business and financing activities separately since they are capitalized differently and have dissimilar cash flow characteristics. Although IBM Global Finance (IGF) contributed approximately 10% of IBM's pre-tax earnings in 2008, it constituted the largest component of IBM's balance sheet, representing approximately 33% of total assets and 34% of total liabilities at year-end 2008.

The main purpose of IGF is to provide financial and capital management products and services to IBM's customers and business partners. IGF has a solid long-term operating record, provides strategic advantages to IBM in terms of attracting and retaining customers by delivering total solutions, and generates an annuity-like revenue stream associated with multi-year leases. Near-term performance measures could be pressured somewhat by portfolio contraction and higher bad debt expenses, but asset quality metrics have remained relatively solid, despite the economic downturn, given a relatively conservative underwriting culture and strong risk management capabilities. IGF's capitalization remains solid for the rating category and leverage levels continue to hover near management's target of 7x.

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.