MOODY'S ASSIGNS A1 SENIOR UNSECURED DEBT RATING TO EURO MTN PROGRAM OF INTERNATIONAL BUSINESS MACHINES CORP., IBM INTERNATIONAL FINANCE, N.V., AND IBM CREDIT CORP.
NEW YORK, 2/29/1996 -- Moody's Investors Service assigned an A1 senior unsecured long-term debt rating to the ECU 3 billion Euro medium term note program of International Business Machines Corp. (IBM Corp.) and its financially-supported subsidiaries IBM Credit Corp. (IBM Credit) and IBM International Finance, N.V. (IBMIF). Each of the three companies are individual issuers under the note program, which supersedes and expands the issuer base of IBMIF's existing ECU 3 billion Euro medium term note program, also rated A1. Moody's already rates each of the issuers under the note program Prime-1 for short-term debt. IBM Corp.'s long- and short-term debt ratings are based on the company's leading worldwide market position in the computer industry, its modestly-leveraged, highly liquid capital structure, and the promising outlook for continued revenue, profit, and cash flow growth at the company over the intermediate-term. IBM Credit's and IBMIF's ratings are based on support and liquidity agreements that link IBM Corp., either directly or indirectly through a wholly-owned subsidiary, to IBM Credit's and IBMIF's financial obligations, and reflect also the strategic importance of these two financially-supported subsidiaries to IBM's global business and financing operations.
The Euro medium-term notes being rated have not been and will not be registered under the United States Securities Act of 1933, as amended ("the Securities Act"), and notes may not be offered, sold, or delivered within the United States or to or for the account or benefit of U.S. persons, except by IBMIF. The note program has been structured so that IBMIF is permitted to sell notes in the United States in private placement sales and in privately negotiated transactions under circumstances reasonably designed to permit resale under Rule 144A.
IBM Corp. Ratings Rationale:
IBM Corp.'s ratings reflect the considerable headway management has made in reengineering IBM since 1993 restoring revenue growth, profitability, and cash flows, while significantly improving the company's competitiveness and operating efficiency. Management has rebuilt IBM Corp.'s liquidity and balance sheet by slashing overhead and expenses while paying down debt and funding huge restructuring costs, largely to reduce employment and capacity levels. This has, along with the increased predictability of cash flows, permitted the company to embark on a $7.5 billion share repurchase program and to make very sizable software acquisitions (including Lotus Development Corp. last year for $2.9 billion in net cash) without materially impairing its restored liquidity. We expect management to maintain a conservative and liquid balance sheet going forward while appropriately reinvesting in its businesses, and we expect that excess cash flows, rather than leverage, will be the primary source of funds used to pay for future share buybacks, large acquisitions, or to absorb additional restructuring costs. We also believe that IBM continues to face major operating and strategic challenges, including, generating consistently profitable hardware revenues and earnings growth; building market share, revenues, and cash flows in its emerging businesses; and preserving over the near-term the revenues and cash flows of its high-margin mainframe and maintenance businesses.
IBM Credit Corp. Ratings Rationale:
IBM Credit's ratings are based on the financial support provided to its debtholders by support and liquidity agreements that link IBM Corp. to the financial obligations of IBM Credit. IBM Credit's ratings reflect also its strategic importance to IBM Corp.'s business and financing operations. IBM Credit is a wholly-owned subsidiary of IBM Corp. engaged in financing the purchase and leasing of IBM Corp. products and related products and services within the United States. IBM Credit also engages in other computer product financings, some of which are related and some of which are not related to the business of IBM Corp. IBM Credit is subject to a support agreement issued by IBM Corp. in which IBM Corp. agrees to retain 100% of the voting capital stock of IBM Credit and to cause IBM Credit to have a tangible net worth of at least $1.00 at all times. IBM Credit is also subject to a liquidity agreement issued by IBM Corp. in which IBM Corp. agrees to advance up to $500 million in immediately-available funds to IBM Credit for its own purposes, including financings.
IBM International Finance, N.V. Ratings Rationale:
IBMIF's ratings are based on the financial support provided to its debtholders by support and liquidity agreements that link IBM Corp. (IBMIF's ultimate holding company) to the financial obligations of IBMIF. IBMIF's ratings reflect also its strategic importance to IBM Corp.'s business and financing operations. IBMIF is a wholly-owned subsidiary of IBM Nederland DP B.V., which is, in turn, wholly-owned by IBM Nederland N.V. IBM Nederland N.V. is a wholly-owned subsidiary of IBM World Trade Europe/Middle East/Africa Corp., one of the wholly-owned subsidiaries of IBM World Trade Corp. (IBM WTC). IBM WTC is a wholly-owned subsidiary of IBM Corp. IBMIF was specifically created to centralize IBM Corp.'s long-term financing in Europe. IBMIF raises borrowings in the international capital or money markets on a regular basis in different currencies according to the situation of the markets, and makes intercompany loans to other IBM subsidiaries in Europe, principally for financing lease receivables.
IBMIF's support agreements are a hybrid -- with ownership and minimum tangible net worth support coming from IBM WTC, but liquidity support coming from both IBM Credit Corp. and from IBM WTC. In a support agreement between IBM WTC and IBMIF, IBM WTC agrees to retain at all times, directly or indirectly, all of the outstanding shares of voting capital stock of IBMIF, and to cause IBMIF to have a consolidated tangible net worth of at least US$1.00, or its equivalent in another currency. This support agreement is, in turn, backed by a separate support agreement between IBM Corp. and IBM WTC in which IBM Corp. agrees to retain, directly or indirectly, all of the outstanding shares of voting stock of IBM WTC, and to cause IBMIF to maintain a tangible net worth of at least US$1.00.
Under a liquidity agreement between IBM Credit and IBMIF, IBM Credit has agreed to make advances to IBMIF upon IBMIF's request up to an aggregate principal amount equal to 5% of IBM Credit's assets or US$500 million in order to provide liquidity or funding. This liquidity agreement is, in turn, supported by a back-up liquidity agreement between IBM Corp. and IBM Credit Corp. in which IBM Corp. agrees to make advances to IBM Credit of an amount equivalent to any advance made by IBM Credit to IBMIF under its own liquidity agreement.
Under a separate liquidity agreement between IBM WTC and IBMIF, IBM WTC agrees (subject to the termination of the IBM Credit liquidity agreement) to make advances to IBMIF at IBMIF's request of an unspecified amount of money sufficient to permit IBMIF to maintain enough liquidity to meet its debt payment obligations. This liquidity agreement is, in turn, supported by a back-up liquidity agreement, dated 1993, between IBM Corp. and IBM WTC wherein IBM Corp. agrees to make advances to IBM WTC of an amount equivalent to any advance made by IBM WTC to IBMIF as a result of its own liquidity agreement.
Moody's stresses that the support and liquidity agreements are not guarantees of payment by IBM Corp. of either IBM Credit or IBMIF. However, Moody's has relied on the validity and enforceability of these agreements when assigning debt ratings to IBM Credit and IBMIF, and the level of support provided to debtholders by these agreements has caused Moody's to rate IBM Credit and IBMIF at the same ratings level as their ultimate parent, IBM Corp.
International Business Machines Corp., headquartered in Armonk, New York, is the world's largest manufacturer of data processing machines and systems. The company is engaged in the design, development, manufacture, and marketing of computers and related products and services. IBM Credit Corp., headquartered in Stamford, Connecticut, is a wholly-owned financially-supported subsidiary of IBM Corp. IBM International Finance, N.V., headquartered in Amsterdam, the Netherlands, is an indirect, wholly-owned, financially-supported subsidiary of IBM Corp.
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