July 12, 2018 / 6:00 PM / 4 days ago

Broadcom's bond spreads blow out after surprise CA bid

NEW YORK (IFR) - Broadcom bondholders were left rattled Thursday after the chipmaker announced a surprise US$18.9bn (£14.3 billion) bid to buy U.S. business software company CA.

A sign to the campus offices of chip maker Broadcom Ltd is shown in Irvine, California, U.S., November 6, 2017. REUTERS/Mike Blake

Broadcom, rated BBB-/BBB, is set to finance the acquisition with US$18bn of unsecured term loans.

Investors have become increasingly cautious about the Triple B rated debt bracket, as M&A continues to cause that segment of the market to balloon, leaving investors at risk of mass downgrades into junk if the economy turns.

Broadcom, which announced the plan to acquire CA on Wednesday, said it expected the combined company to have an investment grade rating, and promised “rapid deleveraging”, but bondholders weren’t so sure.

The spread on Broadcom’s 3.625% 2024s widened as much as 24bp on Thursday - their highest since the bonds were issued in February, according to MarketAxess data.

Broadcom’s outstanding debt stood at US$17.5bn as of May 6.

The CA bid has unnerved both debt and equity investors, because it takes the company into an entirely new market.

It also leaves the status of Broadcom’s planned US$12bn share buyback, announced in April, unclear.

Shares of Broadcom fell sharply, dropping about 15.11% around 1:45 pm in New York. By midday Thursday, Broadcom had lost as much as US$19bn in market value, Reuters reported, as analysts struggled to find any obvious synergies between the two companies.

Broadcom’s chips power smartphones, computers and networking equipment. CA specializes in software for so-called mainframes.

“We are left a bit perplexed and expect investors will be as well,” Credit Suisse equity research analysts led by John Pitzer wrote in a note to clients Wednesday.

“We suspect without further explanation the CA acquisition will likely shake investor confidence in the core business.”

Analysts from research firm CreditSights said Broadcom spreads could continue to widen over the coming days.

“While leverage metrics should remain reasonable and the company should generate nearly US$4bn in free cash flow after dividends in year 1, the pace of post-deal debt reduction and Broadcom’s ultimate leverage target remain uncertain,” analysts wrote.

The deal should take Broadcom’s leverage to roughly 3x gross at close, according to CreditSights. Analysts believe the company could get down to 2x gross leverage in less than three years thanks to its strong cash flow generation.

Broadcom’s bid for CA comes just four months after its US$117bn bid to buy rival Qualcomm was blocked by US President Donald Trump.

Since then, Broadcom has redomiciled from Singapore to the US. The move places it outside the purview of the Committee of Foreign Investment in the United States.

The deal is expected to close in the fourth quarter.

Reporting by Eleanor Duncan; Editing by Jack Doran

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