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Moody's downgrades IBM after Red Hat deal completion

Moody's lowered International Business Machines Corp.'s issuer and senior unsecured ratings to A2 from A1 after the company completed its acquisition of open source software firm Red Hat Inc.

In downgrading the ratings, Moody's senior vice president Richard Lane said the Red Hat deal would lead to "an increase in leverage and represent a departure from IBM's historical acquisition philosophy of making small, tuck-in acquisitions that limit integration risk."

Moody's said IBM's pro forma gross adjusted debt to EBITDA is expected to climb to approximately 3x at the deal's closing from about 1.9x as of March 31.

However, due to IBM's plan to halt share repurchases through 2021 and focus instead on reducing leverage, the gross adjusted debt to EBITDA could decline to the low-2x level about two years from the deal's closing, according to Moody's.

As part of the ratings action, Moody's revised its outlook on IBM to stable from under review, projecting modest growth in the company's revenue and profitability as it proceeds with the Red Hat integration.