SPY411.49+2.97 0.73%
DIA337.86+2.73 0.81%
IXIC13,900.19+70.88 0.51%

Fitch Rates Broadcom's Proposed Senior Exchange Notes 'BBB-'

· 03/16/2021 09:45
Fitch Rates Broadcom's Proposed Senior Exchange Notes 'BBB-'

(The following statement was released by the rating agency)

Fitch Ratings-Chicago-16 March 2021:

Fitch Ratings has assigned 'BBB-' ratings to Broadcom, Inc.'s senior notes exchange offering. In a leverage-neutral transaction, Broadcom will offer to exchange up to $2 billion of new notes due 2033 and up to $3 billion of notes due 2034 plus a cash payment for a first pool of existing senior notes with 2025 maturities and a second pool of existing notes with 2024, 2026 and 2027 maturities, respectively.

The ratings and Stable Outlook reflect Broadcom's revenue diversification with an increasing mix of recurring software revenue, solid positions in focus markets and sector leading profit margins. Its outsourced manufacturing model may temper near-revenue term growth in the face of chip capacity shortages but supports its solid cash flow profile, even after its hefty cash dividend policy. The rating and Outlook are constrained by Fitch's expectation that Broadcom will remain acquisitive in the software space, likely requiring at least partial debt funding and limiting meaningful credit metric strengthening.

The proposed exchange consists of Broadcom offering up to $2.0 billion of new notes due 2033 in exchange for, in order of priority, Broadcom Corp.'s $1.0 billion of 3.125% notes and the company's $2.25 billion of each of 4.7% and 3.15% notes. Broadcom will also offer up to $3.0 billion of new notes due 2034 in exchange for a second pool of notes consisting of, in order of priority, $1.4 billion of 3.625% notes due January 2024, $1.0 billion of 3.625% notes due October 2024, $2.5 billion of 4.25% notes due April 2026, $4.8 billion of 3.875% notes due January 2027, $350 million of 4.7% notes due March 2027 and $1.7 billion of 3.459% notes due September 2026.

The exchange notes will be pari passu with Broadcom's existing senior unsecured obligations, including full and unconditional guarantees by Broadcom Technologies, Inc. and Broadcom Corp. on an unsecured and unsubordinated basis.


Key Rating Drivers

Acquisitive Nature: Fitch expects Broadcom will remain acquisitive in the infrastructure software space, given still considerable industry fragmentation and lower political and regulatory risk compared with that of semiconductors. The company's track record suggests that at least partially debt-financed mid- to large-scale acquisitions are more likely than organically funded tuck-in deals. Nonetheless, Fitch expects Broadcom to use post-deal FCF to return credit metrics to within long-term ranges consistent with investment grade ratings over the subsequent 12-24 months.

Growth Profile: After stronger than forecasted operating performance in fiscal 2020, Fitch expects another year of solid organic revenue growth for Broadcom driven by end markets recovering from the onset of the coronavirus pandemic and supply constraints that have lengthened lead times since last year. Double bookings remain a concern for the semiconductor sector, but Fitch believes broad-based recovery will augment secular semiconductor content growth, and Broadcom's all-you-can-eat software model over the near term.

Software Revenue Diversification: Broadcom's increasingly diversified revenue portfolio should reduce longer-term operating volatility. Its increasing revenue exposure in subscriptions and services, which Fitch estimates was roughly 30% in fiscal 2020, is highly recurring and meaningfully offsets product-driven volatility associated with Broadcom's consumer business. Meanwhile, its semiconductor product exposure is largely to DC and service providers, providing meaningful customer and end-market diversification, as well as longer lifecycle products such as broadband and set-top boxes.

Strong Profit Margins: Broadcom's profit margins are among the industry's highest, due to software assets and leading positions across a broad set of infrastructure markets and wired infrastructure markets, such as ethernet switching, fiber-optic components and set-top boxes. The company's acquisitions shifted the sales mix away from FBAR filters for handsets, in which it has very strong share but less leverage with a consolidated customer set. Broadcom's software acquisitions also increased predictability of profiles, given considerable recurring maintenance and support revenue.


Derivation Summary

Fitch believes Broadcom is appropriately rated at 'BBB-' with its strong operating profile offset by a track record for debt-funded acquisitions weighing on credit metrics. The company's operating profile is strong for the 'BBB-' category due to robust profit margins, end-market and customer diversification and leading market share positions. Broadcom's financial structure remains weak for the 'BBB-' rating on an operating EBITDA basis due to recent debt-financed acquisitions, but strong for the rating on a cash flow basis in part due to the company's low capital intensity. Fitch expects pre-dividend FCF to total debt of more than 25% and total debt to operating EBITDA below 3.0x through the forecast period.

Broadcom's operating profile is stronger than those of its peers, including Micron Technology Inc. (BBB-/Stable), which is more cyclical and capital-intensive but also more conservatively capitalized. Compared with NXP Semiconductors N.V. (BBB-/Stable), Broadcom's greater financial flexibility and stronger profitability offset NXP's comparatively conservative financial policies. When compared with Marvell Technology Group Ltd. (BBB-/Stable), Broadcom's financial structure should remain less conservative despite more recent partially debt-funded acquisitions by Marvell.


Key Assumptions

--Mid-single-digit revenue growth in fiscal 2021 from the continuation of software growth and solid semiconductor demand;

--Modest positive revenue growth through the remainder of the forecast period from moderating semiconductor and slowing software growth;

--Near-term operating EBITDA margin expansion from revenue growth and a higher mix of software sales.

--Flattish profit margins through the remainder of the forecast, driven by slowing organic revenue growth.

--Dividends equal to 50% of pre-dividend FCF and stock buybacks only with sustained excess cash balances;

--Smaller acquisitions funded with cash flow or mixed funding for larger deals with the expectation Broadcom will use post-close cash flow to reduce financing debt.

--Non-acquisition-related debt maturities are refinanced.


RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--Expectations that Broadcom will maintain total debt to FCF closer to 3.0x and total debt to operating EBITDA of 2.5x, from a combination of debt reduction and profitability growth.

--Operating EBITDA margin expansion from continued positive organic revenue growth.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--Expectations for total debt/FCF in excess of 8.0x or total leverage above 3.0x, driven by acquisitions without sufficient profitability or subsequent debt reduction.

--Expectations for shrinking organic revenue or market share losses, likely from overly aggressive cuts to R&D.


Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.


Liquidity and Debt Structure

Solid Liquidity: Fitch expects liquidity will remain solid for the rating and, as of Jan. 31, 2021, was supported by $9.6 billion of cash and cash equivalents and an undrawn $7.5 billion revolving credit facility expiring 2026. Fitch's expectation for $4 billion-$6 billion of annual FCF also supports liquidity.


Summary of Financial Adjustments

Fitch made no material adjustments to the published financial statements of Broadcom Inc.


Date of Relevant Committee 22 September 2020
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.

Broadcom Inc.
----senior unsecured; Long Term Rating; New Rating; BBB-

Contacts:
Primary Rating Analyst
Jason Pompeii,
Senior Director
+1 312 368 3210
Fitch Ratings, Inc.
One North Wacker Drive
Chicago, IL 60606

Secondary Rating Analyst
Alen Lin,
Senior Director
+1 312 368 5471

Committee Chairperson
David Peterson,
Senior Director
+1 312 368 3177

Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com

Additional information is available on www.fitchratings.com
Applicable Model
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1)

Additional Disclosures
Solicitation Status
Additional Disclosures For Unsolicited Credit Ratings
Endorsement Status
Endorsement Policy

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR WHICH THE LEAD ANALYST IS BASED IN AN ESMA- OR FCA-REGISTERED FITCH RATINGS COMPANY (OR BRANCH OF SUCH A COMPANY) CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH RATINGS WEBSITE.

Copyright © 2021 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001
Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.