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Rating Action:

Moody's downgrades IBM's senior unsecured rating to A1; outlook stable

03 May 2017

New York, May 03, 2017 -- Moody's Investors Service ("Moody's") downgraded the senior unsecured rating of International Business Machines Corporation ("IBM") to A1, and changed the rating outlook to stable from negative. "Despite still solid debt protection measures and progress in transitioning its business towards becoming a provider of enterprise class, data analytics and cloud-based offerings, the downgrade reflects the transformation and high level of investments which have negatively impacted IBM's profitability and cash flow, as well as concerns that IBM will remain challenged for a longer than previously anticipated time to grow total revenue and return to the margin profile achieved prior to 2016," said Moody's Senior Vice President, Richard Lane.

The following summarizes today's rating action:

Downgrades:

..Issuer: International Business Machines Corporation

.... Issuer Rating, Downgraded to A1 from Aa3

....Senior Unsecured Shelf, Downgraded to (P)A1 from (P)Aa3

....Senior Unsecured Regular Bond/Debenture, Downgraded to A1 from Aa3

Outlook Actions:

..Issuer: International Business Machines Corporation

....Outlook, Changed To Stable From Negative

Affirmations:

..Issuer: IBM International Group Capital LLC

....Senior Unsecured Commercial Paper, Affirmed P-1

..Issuer: IBM International Treasury Services Company

....Senior Unsecured Commercial Paper, Affirmed P-1

..Issuer: International Business Machines Corporation

....Senior Unsecured Commercial Paper, Affirmed P-1

RATING RATIONALE

IBM's A1 senior unsecured long-term and Prime-1 short-term ratings reflect IBM's revenue, customer, and geographic diversity as well as its strong liquidity and solid debt protection metrics. The company has progressed in transitioning its broad portfolio towards becoming a provider of enterprise class, cloud services and solutions company, with its suite of "strategic imperatives" (SI) businesses (data analytics, cloud, mobile, security, and social) also supportive of the rating. Nevertheless, IBM's total revenue (on a constant currency basis and adjusted for divestitures) has been flat or negative for the last nineteen quarters, reflecting, in part, the ongoing, multi-year industry shift of IT demand to cloud based offerings from traditional, on-premises hardware and software solutions.

IBM's SI businesses will continue to grow at a double digit percentage level over the next few years, expanding by $4 billion or more annually off of the $34 billion revenue base as of the twelve months ended March 2017. SI revenue represents 43% of total IBM revenue, ahead of the company's target of SI comprising over 40% of revenue by 2018. Continued high single-digit to low double-digit declines in its portfolio of legacy businesses, however, in addition to ongoing investments to build and scale its SI business, will more than offset the SI revenue growth resulting in lower profitability and cash flow over at least the next year. While still strong, Moody's expects profitability and cash flow will be weaker than previously anticipated as IBM continues its pivot to various cloud based solutions. Moody's projects profitability and cash flow will be flat to slightly lower this year and then slightly up in 2018.

Moody's expects that IBM will continue to invest in strategic acquisitions, acquiring mainly data rich software and service oriented companies to support the growth of its cognitive solutions business (represented by its various "Watson" offerings) as the company continues to reach into new end-markets, such as health care, to pursue growth.

Moody's expects IBM will generate EBITDA of about $17.5 billion, and cash from operations less capital expenditures of $10 billion over the next year, all adjusted using Moody's standard adjustments. With dividends of about $5.5 billion, we project IBM will generate free cash flow of about $4.5 billion in 2017, down from $5.1 billion and $6.8 billion in 2016 and 2015, respectively. IBM will continue to be acquisitive, as it builds out its cognitive solutions platform, however, consistent with its practices, Moody's does not anticipate large transactions that can be distracting and difficult to integrate.

Moody's anticipates IBM will continue to demonstrate conservative financial policies, including maintaining shareholder returns well within the confines of free cash flow. We also anticipate that the company will operate with leverage, as measured by adjusted debt to EBITDA, around 1.8x (currently 1.7x) over the next couple of years. IBM has historically maintained a liquid balance sheet, with cash over $8 billion and a $10 billion commercial paper program, fully backstopped by a five year committed revolving credit facility of equal size. This strong liquidity provides operational and financial flexibility and adds incremental support to the rating.

The stable outlook reflects Moody's expectations that IBM's revenue, profitability and liquidity will not meaningfully deteriorate beyond current levels as the company progresses with its broad portfolio transition.

Longer term, the ratings could be upgraded if IBM demonstrates revenue growth in the low-to-mid single-digits and reduced competitive pressures throughout its broad operations. Additionally, EBITDA margins sustained above the mid 20% level coupled with continued financial conservatism, including adjusted debt to EBITDA sustained at less than 1.5 times, and the maintenance of a strong balance sheet and alternate liquidity could also contribute to upwards rating pressure.

Downward ratings pressure could emerge if IBM's revenue, profitability, or cash flow decline meaningfully, which scenario would imply unexpected headwinds to IBM's strategic imperative revenue streams. Furthermore, if management becomes more aggressive in the use of debt to fund acquisitions or shareholder friendly activities such that adjusted debt/EBITDA is sustained above 2.25 times or if its strong liquidity profile weakens, the ratings could be pressured.

The principal methodology used in these ratings was Diversified Technology Rating Methodology published in December 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

International Business Machines Corp. ("IBM") is one of the world's leading providers of hardware systems, software and technology related services. We expect IBM will generate $79 billion of revenue over the next year.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Richard J. Lane
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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