IBM Message Board - Msg: 17566140

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Technology Stocks : IBM

IBM 306.49

-1.9%

3:45 PM EST

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To: Charles Tutt who wrote (7696)	6/6/2002 1:39:05 PM
From: Arrow Hd.	Read Replies (3) of 8218

Maybe I can offer a different view of this debt issue that will serve to address everyone's point of view. IBM has two basic kinds of debt. There are more but most of the debt falls into two categories: debt for general operations as a technology company and debt for financing their Global Financing organization which is like a banking company. As a technology company that part of IBM's debt is very low, almost debt free. As a banking company that part of IBM's debt level is a very conservative ratio to the assets financed or owned as a lessor. The key point that has been totally missed in the discussion so far is that under the IBM Term/Lease Master Agreement which is the document that governs the IBM Global Financing operations, IBM has a lien against all of the equipment it is financing but since this equipment is not under IBM title it is not on IBM's books so it appears that there is all this debt that has no corresponding asset so people assume it is to run operations but that is not the case. The debt is secured through liens against the customer's financed equipment so if they all went belly up IBM would go in and repossess the equipment which takes us to the next issue -- residual value assumptions inherent in the contract. What that means is: is the equipment repossessed worth more than the debt which secures it. And the answer is yes because IGF uses very conservative assumptions which are accurate since they know the IBM follow-on replacement product lines, their pricing assumptions and the wholesale used market into which the repossessed asset gets dumped. Or the asset can be used internally. So this is a much more orderly market than what SUN, EMC and Cisco experienced when the Telecom and Hosting sectors exploded the past few years. So the IGF debt is nothing more than a function of running a banking operation. They have a line of credit they draw on when a deal is closed. The deal is written so that the customer's financed asset has a lien against it so the debt is backed up by an asset under very conservative residual value assumptions. The secondary market is stable, serial numbers are limited due to the dynamic upgrade capability of turning on memory and engines through LIC Controlled Configuration Change, the financing market is stable with fewer players such as the loss of Comdisco, etc. IGF is a very profitable going concern, a business that could easily survive by itself and debt is just part of that industry and IGF's debt ratios are some of the best in the financing industry.

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