IBM Brings Blockbuster Bond Deal

International Business Machines Corp. (IBM) kicked off a debt offering 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 senior unsecured bonds in as many as eight parts to help fund its $33 billion 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.

IBM is starting the bond sale just days after receiving U.S. regulatory approval of the of Red Hat purchase. The company said it’s working with competition authorities in other jurisdictions—European Commission clearance is outstanding—though IBM still expects the transaction to close in the second half of this year.

The 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 lowest and largest tier of investment-grade corporate debt, they wrote.

The offering also comes during a busy time for issuance in the investment-grade corporate bond market, where sales are expected to reach $120 billion this month. Bristol-Myers Squibb Co. kicked off the frenzy with a $19 billion offering Tuesday, while T-Mobile US Inc. and Fidelity National Information Services Inc. are expected to follow suit in the coming weeks to fund their own merger and acquisition (M&A) transactions.

To fund the Red Hat deal, IBM took out a $20 billion bridge loan and will use some of its $17 billion cash pile, the company said in October when the transaction was announced. At the time, S&P Global Ratings and Fitch Ratings cut IBM one level, to A, the sixth-highest investment-grade rating. IBM remains on review for downgrade at Moody’s Investors Service.

The Red Hat acquisition will be the world’s second-largest technology deal ever. It boosts IBM’s credentials in the fast-growing and lucrative cloud market. The Red Hat deal provides much-needed potential for real revenue growth for IBM, which has lagged behind market leaders Amazon.com Inc. and Microsoft Corp. in adopting cloud-related technologies.

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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