S&P Downgrades IBM’s Credit Rating to ‘A+’

The rating agency says IBM's transition to operating stability as it spends heavily on new businesses "will take longer than we had previously fore...
Matthew HellerMay 9, 2017
S&P Downgrades IBM’s Credit Rating to ‘A+’

S&P Global has downgraded IBM’s credit rating, citing the company’s heavy spending as it attempts to implement a turnaround strategy.

The rating agency said it had lowered IBM’s corporate credit and issue-level ratings to ‘A+’ from ‘AA-‘ while also changing its ratings outlook from negative to stable.

“The downgrade reflects IBM’s transformation with operating declines in recent years as it reinvests and repositions its business to achieve better performance and our expectation that the transition to operating stability will take longer than we had previously forecast,” S&P Global credit analyst John Moore said in a news release.

“We forecast less improvement to operating margins over the next two years compared with our previous expectations, with higher investment in the company’s turnaround,” he added.

Big Blue has been reorganizing itself around a set of emerging cloud, security, and data analytics businesses that CEO Ginni Rometty has dubbed “strategic imperatives. But its first-quarter sales were below expectations and its shares have declined by nearly 10% in the past three months.

Revenue from “strategic imperatives” rose 37% to $7.8 billion in the latest quarter, but cloud infrastructure services saw a surprising 2% decline.

The S&P downgrade followed a similar move last week by Moody’s, which predicted IBM’s “high level of investments” in its turnaround strategy would weigh on revenue growth and margins for longer than expected.

In addition, Warren Buffett’s Berkshire Hathaway revealed it had reduced its stake in IBM by a third, with Buffett saying he “doesn’t value IBM the same way” he did when he started buying the stock six years ago.

S&P said IBM’s stable outlook “reflects our expectation that IBM’s operating performance will remain flat to slightly down through 2018“ and an upgrade in the credit rating was less likely over the coming year “considering the company’s exposure to legacy businesses in secular decline and investments needed to improve its competitive positioning and operating performance.”