Fitch Affirms IBM at 'AA-'; Stable Outlook.

Business Editors

NEW YORK--(BUSINESS WIRE)--Jan. 22, 2003

Fitch Ratings affirms International Business Machines Corp.'s (IBM) 'AA-' senior unsecured debt and 'F1+' commercial paper (CP) program. In addition, Fitch also affirms IBM Credit Corp.'s ('Credit') and IBM International Finance N.V.'s 'AA-' senior unsecured debt and 'F1+' CP program. Approximately $26 billion of public debt is affirmed. The Rating Outlook is Stable.

The ratings affirmation concludes Fitch's analysis of IBM's U.S. pension funding on an accumulated benefit obligation (ABO) basis in 2002, which was originally commented by Fitch on December 5, 2002. Fitch has consistently believed that IBM's decision to fully fund its U.S. pension was generally positive, especially considering the strong cash flow generation capabilities and ample financial flexibility the company has historically demonstrated. However, Fitch's concern centered on the magnitude of the funding, the portion which would be funded with cash, and the resultant impact on the company's balance sheet and financial flexibility at current rating levels. IBM fully funded the U.S. pension plan, which represents approximately two-thirds of the company's worldwide plans, with $2.1 billion in cash and $1.9 billion in IBM common stock. However, the company achieved better-than-expected cash flow results for the fourth quarter of 2002 from operating performance and strong working capital management in addition to an unexpected tax refund of approximately $460 million resulting in a year-end cash position of $6.0 billion. These financial and operating results were key factors in Fitch's affirmation of the ratings and the Stable Rating Outlook.

IBM's liquidity remains strong with $6.0 billion in cash and marketable securities as of December 31, 2002, significant free cash flow, and a nearly undrawn $12 billion credit facility consisting of a $4 billion 364-day facility and an $8 billion 5-year facility expiring in May 2006. The company's gross stock repurchase program totaled approximately $4.2 billion for 2002 compared to $5.3 billion in 2001. IBM reduced its stock buyback efforts in the second half of 2002, partially to fund the U.S. pension plan and the PwC Consulting acquisition for $3.5 billion, of which $2.7 billion was cash. Fitch anticipates that the company's stock repurchase program will be reduced further in 2003.

Total debt at year-end 2002 was $26.0 billion, down $1.2 billion from 2001, of which nearly 92% supported end-user and business-partner financing operations with the remaining debt supporting IBM's core operations. Fitch expects core debt will increase in the near-term due to seasonality. The company's CP balance at the end of the year was $1.3 billion and approximately $4.8 billion of debt matures in 2003 and $3.3 billion in 2004.

The ratings overall continue to be supported by IBM's strong financial flexibility due to consistent free cash flow, a discretionary stock repurchase program, and prudent financial management. The current ratings also reflect IBM's strong balance sheet, despite large financing operations, industry-leading positions, solid information technology (IT) services segment and significant research and development program. Rating concerns center on the integration challenges associated with company's acquisition of PwC Consulting, the competitive nature of the computer industry and IBM's fluctuating performance in its hardware segment, pricing pressures, further expansion of the semiconductor unit which is more capital-intensive and volatile, and any on-going pension funding requirements.