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 bank 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'.

Furthermore, Fitch has withdrawn the ratings for IBM International Finance N.V. since the entity no longer has any outstanding debt.

The Rating Outlook is Stable. Approximately $44 billion of debt, including the company's undrawn $10 billion credit facility, is affected by Fitch's action.

The Ratings and Outlook reflect IBM's:

---Strong liquidity supported by a solid cash position and consistent and increasing free cash flow;

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

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

---Breadth and quality of product and service offerings, including leading market share in IT services, middleware software, servers and storage.

Ratings concerns include:

---Further expansion of core debt in order to achieve financial and/or business objectives, such as sizable debt-financed share repurchases and/or acquisitions, which result in a material reduction of credit protection measures;

---Consistent, material increases in cash dividends long-term, which could potentially pressure free cash flow and financial flexibility, necessitating further increases in core debt to fund acquisitions and/or share repurchases.

---Capital expenditure requirements for volatile semiconductor segment.

IBM has ample financial flexibility and liquidity due to a solid balance sheet with $9.8 billion of cash and equivalents as of June 30, 2008. Liquidity is further supported by strong, consistent and increasing free cash flow (post-dividends), which increased to $10.1 billion for the latest 12 months (LTM) ended June 30, 2008 from an average of approximately $8.5 billion for the prior three fiscal years. IBM also has an undrawn $10 billion revolving credit facility that expires on June 28, 2012. 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, to an increasing degree, pay cash dividends to shareholders.

Total debt was approximately $34.2 billion as of June 30, 2008, consisting of approximately $12.7 billion of short-term debt, including $3.6 billion of CP, and $21.5 billion of long-term debt. Fitch estimates $25.1 billion, or 73%, 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 debt maturities in the next 18 months, the vast majority of which occur in 2009. Fitch estimates upcoming debt maturities of approximately $2.3 billion in the second half of 2008 and $8.3 billion 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 seven times for the financing business and a core debt to core capitalization ratio of approximately 20%-30%.

Fitch estimates total leverage (total debt to operating EBITDA) was 1.5 times (x) at June 30, 2008 compared with 1.8x in the prior year. Total interest coverage (operating EBITDA/total interest expense) remains solid at nearly 15x for the LTM ended June 30, 2008 compared with approximately 17x in the year-ago period due to increased interest expense from maintaining higher financial leverage. Core leverage was approximately 0.4x at June 30, 2008 compared with 0.7x in the prior year due to core debt reduction of nearly $2.8 billion and core EBITDA growth of nearly 17%. Core interest coverage remains strong at nearly 30x for the LTM ended June 30, 2008 compared with approximately 52x in the year-ago period.

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.