IBM Brings Blockbuster Bond Deal as Market Defies Trade Drag

(Bloomberg) -- International Business Machines Corp. kicked off a debt sale that’s likely to make this the corporate-bond market’s busiest week in at least eight months, a rare buying frenzy amid turbulent markets globally.

The computer-services giant plans to sell what could be $20 billion of senior unsecured bonds to help fund its acquisition of Red Hat Inc., according to a person with knowledge of the matter. The longest portion of the offering, a 30-year security, may yield around 1.55 percentage points more than Treasuries, said the person, who asked not to be identified as the details are private.

The U.S. investment-grade corporate bond market reached record highs on Tuesday, shrugging off the trade war fears that have weighed on stocks and oil this week. Bristol-Myers Squibb Co. managed on Tuesday to sell the biggest corporate bond offering of the year, a $19 billion deal, and high-grade issuance this week could top $40 billion. That would be the most since September according to data compiled by Bloomberg. High-yield issuers are also taking advantage of the buying frenzy-- they collectively had their busiest day in three months.

The market turmoil of recent days may be spurring companies that had been waiting for an opportune moment to borrow now, said Lale Topcuoglu, senior fund manager and head of credit at J O Hambro Capital Management. Issuance tends to slow down over the summer, giving limited time for corporations to sell debt.

“If you’ve got to get a deal done and there’s even a little uncertainty about the markets, that’s an additional push,” Topcuoglu said. “You really have May to crank as much as you can.”

More big bond offerings are coming. T-Mobile US Inc. and Fidelity National Information Services Inc. are expected to issue debt in the coming weeks to fund their respective acquisitions.

IBM’s bond sale could be in as many as eight parts, and the offering is starting just days after the company received U.S. regulatory approval for its planned $33 billion Red Hat purchase. IBM said it’s working with competition authorities in other jurisdictions -- European Commission clearance is outstanding -- though the company still expects the transaction to close in the second half of this year.

The Red Hat purchase will push the combined company’s borrowings above $60 billion with debt that’s more than three times a key measure of earnings, said Bloomberg Intelligence analysts Robert Schiffman and Mike Campellone. Though IBM won’t buy back shares in the next two years, it still risks a potential downgrade to the BBB range, the tier of corporate debt that’s just above junk, they wrote.

IBM took out a $20 billion bridge loan to fund the Red Hat deal and will use some of its cash pile, the company said in October when the transaction was announced. S&P Global Ratings and Fitch Ratings cut IBM one level to A at the time, the sixth-highest investment-grade rating, while it remains on review for downgrade at Moody’s Investors Service.

The Red Hat acquisition will be the world’s second-largest technology deal ever and boosts IBM’s credentials in the fast-growing and lucrative cloud market. Red Hat gives IBM much-needed potential for real revenue growth, as it has been slow to adopt cloud-related technologies and lagged market leaders Amazon.com Inc. and Microsoft Corp.

BNP Paribas SA, Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co., Mizuho Financial Group Inc. and Mitsubishi UFJ Financial Group Inc. are managing the bond sale, the person said.

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