International Business Machines (IBM) announced an offer to certain debt holders to exchange their long-term debt with bonds carrying a lower interest rate plus cash.
IBM said that the 7.125% debentures due 2096, 7% debentures due 2045 and 8% notes due 2038 can be swapped for a new series of 5.6% senior notes due 2039 and cash. The new debt will be unsecured senior notes.
To make the bond holders agree and lure them to tender early and exchange higher-interest debt with lower rate notes, IBM is willing to offer extra cash and bring maturity dates forward. The company is also offering an early exchange premium to holders who tender their old notes before Nov 20. For example, the holders who exchange their 8% debt will get an extra 10% worth of new notes.
IBM intends to take advantage of the favorable interest rate environment. This offer is expected to benefit both the company and the bond holders. The investors will be benefited from the extra and immediate cash, while the company will reduce its interest payments and benefit from lower interest payouts. This will help boost IBM’s bottom line.
The company raised its earnings outlook for fiscal 2009, the second time in the year, and now expects full year earnings of at least $9.85 per share, up from the previous forecast of $9.70. We believe the debt exchange offer will help the company meet its guidance.
IBM will also pay accrued and unpaid interest in cash on the old notes accepted in the exchange offers. The company said that the exchange offer will terminate on Dec 7, 2009.
Moreover, this move will help IBM preserve money and strengthen its balance sheet by reducing debt. IBM ended the most recent quarter with $11.5 billion in total cash and marketable securities. The company reported cash flow from operations (excluding Global Financing receivables) of $4.4 billion, with free cash flow of $3.4 billion. Debt was reduced by $4 billion in the quarter.
The company generated $18.8 billion from operating activities in 2008 through its efficient business model. This compares with $16.1 billion in 2007 and $15.0 billion in 2006. Over the past six years, IBM generated nearly $65.0 billion in free cash flow. The strong cash flow provides it the financial flexibility required for strategic investments in changing business environments.
The company also paid a 55 cent per share dividend on Nov 6. IBM has increased its quarterly dividend by 150% since 2006, with 2008 being the thirteenth straight year of increase in quarterly cash dividend.
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