Fitch affirms IBM's IDRs at 'A+/fF1'; outlook stable

June 20 (Reuters) - NEW YORK, June 20 (Fitch) 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 IDR at 'A+'; --Senior unsecured revolving credit facility at 'A+'; --Senior unsecured debt at 'A+'; --Short-term IDR at 'F1'; --Commercial paper (CP) rating at 'F1'. IIGC --Long-term IDR at 'A+'; --Senior unsecured debt at 'A+'; --Short-term IDR at 'F1'; --CP rating at 'F1'. The Rating Outlook is Stable. Fitch's action affects approximately $42 billion of debt, including IBM's undrawn $10 billion credit facility. The ratings and Outlook reflect IBM's: --Strong company profile primarily supported by i) significant revenue market share in information technology (IT) services (#1), servers (#1), enterprise software (#1) and external storage (#2); ii) Solid recurring revenue (50%) from IT services, software and financing that mitigates revenue and profit volatility; and iii) Highly diversified revenue base by offering, customer, industry and geography (60%+ revenue outside U.S.). --Exceptional financial flexibility due to i) robust internal liquidity with a significant cash position ($12 billion) and free cash flow (FCF) exceeding $11 billion since 2008; ii) solid external liquidity with an undrawn $10 billion RCF due 2016 and ready access to capital markets; iii) strong credit protection metrics; and iv) Roughly $26 billion of finance receivables (59% short-term and 62% considered investment grade). --Well executed management strategy, including i) ability to identify early trends that present significant higher margin, long-term growth opportunities and reposition investment priorities, both organic and inorganic, to capitalize on these opportunities (i.e. analytics and growth markets); ii) consistent and sizable investments in R&D (6% of revenue) to develop innovative differentiated solutions that leverage IBM's entire portfolio of offerings and command higher profit margins (i.e. Smarter Planet); iii) core competency in identifying and integrating strategic acquisitions and iv) established track record of consistently meeting or exceeding financial forecasts. 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. Fitch notes IBM has significant incremental debt capacity without adversely affecting its current credit ratings. --Consistent, material increases in cash dividends long-term, which could pressure FCF and financial flexibility in the absence of commensurate growth in profitability. This could necessitate further increases in core debt to fund acquisitions and/or share repurchases. --Long-term outlook for mainframe demand (system z) and associated operating system software (zOS) as industry standard servers become increasingly capable. This could potentially narrow the cost (i.e. total cost of ownership) and benefit differential to mainframes. IBM has strong financial flexibility and liquidity supported by $12.3 billion of cash and equivalents as of March 31, 2012 and an undrawn $10 billion revolving credit facility expiring on Nov. 10, 2016. Liquidity is further supported by strong and consistent annual FCF (post-dividends) exceeding $11 billion since 2008. Fitch expects IBM's FCF to be approximately $13 billion in 2012. This is primarily due to continued profit margin expansion, reflecting a more favorable revenue mix and continued cost discipline. Also a factor is modest top-line growth led by Smarter Planet solutions, business analytics, growth markets and cloud computing. Fitch expects IBM to continue to use FCF for acquisitions, particularly in the software and services industries, aggressive share repurchases and dividend payments to shareholders. The underfunded status of IBM's worldwide defined benefit (DB) pension plans deteriorated to negative $10.4 billion (89% funded) at year-end 2011 from negative $7.9 billion (92% funded) in 2010. This is primarily due to lower discount rates in the U.S. and worldwide plans, which increased the present value of IBM's future pension liability (US discount rate declined 80 basis points to 4.2%). Excluding unfunded nonqualified DB pension plans, the funded status of IBM's U.S. and worldwide plans at year-end 2011 and 2010 was 96% and 99%, respectively. In 2012, IBM is legally mandated to contribute a minimum of $800 million to its international DB plans. This compares with approximately $800 million actually contributed in 2011. The amount of the 2012 pension contribution is very manageable given the amount and consistency of IBM's cash flow. Fitch believes IBM has more than ample liquidity to satisfy its longer-term legally mandated pension funding requirements (estimated at approximately $3.9 billion through 2016). This estimate could increase due to more frequent re-measurement of funded status in certain non-U.S. countries and the performance of financial markets. Total debt was $32.1 billion as of March 31, 2012 and consisted of $6.3 billion of short-term debt (including $300 million of CP) and $25.8 billion of long-term debt. Fitch estimates $23.6 billion (74%) of total debt is attributable to IBM's global financing business with the remaining debt attributable to core (non-financing) operations. 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. IBM Global Finance (IGF) accounted for nearly 9% of IBM's pre-tax earnings in 2011. This, however, represents the largest component of IBM's balance sheet, constituting approximately 28% of total assets and 25% of total liabilities as of March 31, 2012. IBM has $2.9 billion of long-term debt maturing in the remainder of 2012 and nearly $5.5 billion in 2013. 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. Total leverage and interest coverage as of March 31, 2012 were relatively unchanged at 1.2x and 27.8x, respectively. Core leverage and interest coverage remained flat at 0.3x and 62.2x, respectively. The main purpose of IGF is to facilitate clients' acquisition of IBM systems, software and services by providing financial and capital management solutions. IGF has a solid long-term operating record, provides strategic advantages to IBM in terms of attracting and retaining customers by delivering total solutions. IBM also generates an annuity-like revenue stream associated with multi-year leases. IGF's primary focus on IBM's products and clients mitigates some risks associated with financing via a deep knowledge of its client base and clear insight into the solutions being financed. Asset quality metrics have remained relatively solid due to 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.