New York, June 11, 2020 -- Moody's Investors Service, ("Moody's") affirmed
the ratings of Broadcom Inc. ("Broadcom") and Broadcom
Technologies Inc. ("Broadcom Technologies"),
including the Baa3 senior unsecured ratings of Broadcom and Broadcom Technologies
and Broadcom's P-3 commercial paper rating. In addition,
Moody's assigned a stable outlook to Broadcom. Broadcom Technologies
outlook remains stable.
Ratings affirmed:
..Issuer: Broadcom Inc.
.Senior Unsecured Notes: Affirmed Baa3
.Senior Unsecured Commercial Paper: Affirmed P-3
Outlook Actions:
..Issuer: Broadcom Inc.
.Outlook: Assigned Stable
Ratings affirmed:
..Issuer: Broadcom Technologies Inc.
.Senior Unsecured Notes: Affirmed Baa3
Outlook Actions:
..Issuer: Broadcom Technologies Inc.
.Outlook: Remains Stable
RATINGS RATIONALE
The ratings affirmation reflects Broadcom's steady financial performance
in the recently-reported fiscal second quarter (ended May 3,
2020) despite the economic disruption caused by the coronavirus outbreak
and the resulting contraction in global economic activity. Broadcom's
steady performance reflects exposure to continuing secular growth drivers
like cloud data center spending, which serve to offset some of the
weakness in consumer and general business spending due to the global economic
recession. The affirmation also reflects Broadcom's diverse
revenue base, which is resilient to potential future negative demand
shocks over the next year.
Revenue volatility is generally limited due to Broadcom's broad
semiconductor chip portfolio. The company's mission-critical
software product lines for large enterprises, which are sold under
multi-year contracts, provides a base of recurring revenues.
Broadcom's extensive semiconductor chip portfolio is sold into diverse
end markets spanning consumer, cloud data center, enterprise,
and telecommunications service providers, which tends to blunt revenue
declines in any single end market. The credit profile benefits
from Broadcom's modest capital intensity, which supports free
cash flow ("FCF") generation, and excellent liquidity
supported by a large cash balance and the undrawn $5 billion revolving
credit facility.
Broadcom's Baa3 senior unsecured rating reflects the company's
considerable scale, with leading market positions in several product
areas, including certain mainframe software development tools,
radiofrequency filters for smartphones, and connectivity chipsets.
Moreover, Broadcom has committed to following a conservative financial
philosophy, using FCF to reduce debt and to build cash in advance
of future acquisitions, which should allow Broadcom to pursue its
acquisition program and yet maintain modest leverage over time.
The acquisition of Symantec Corp.'s Enterprise business ("Enterprise")
on November 4, 2019 added a strong portfolio of cybersecurity products
to complement Broadcom's software portfolio. The diversified
end markets and the fab-lite operating model provide stability
to revenue and FCF (after dividends) over the long term. Still,
given the execution risks integrating Enterprise and the exposure to the
cyclical Semiconductor market (70% of revenues), the high
financial leverage of 4.5x adjusted debt to EBITDA (twelve months
ended May 3, 2020) limits financial flexibility.
The stable outlook (held by Broadcom Technologies Inc.) reflects
Moody's expectation of a near term decline in end market demand
due to the impact of the coronavirus outbreak on the global economy and
Semiconductor market in calendar year 2020. With the global recession,
Moody's expects that adjusted leverage will increase during 2020
due to declining revenues and EBITDA. Moody's anticipates
that after the abatement of the pandemic and a recovery in end market
demand, revenues and the EBITDA margin (Moody's adjusted)
will gradually recover in calendar year 2021. Once the market rebounds,
Moody's expects that Broadcom will progress in capturing the cost
synergies from the Enterprise acquisition and will prioritize debt reduction
such that the company will be on-track to reducing adjusted debt
to EBITDA to about 3.5x by the end of the fiscal year ending November
2, 2021.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The semiconductor sector
has been one of the sectors affected by the shock given its sensitivity
to consumer and enterprise demand and sentiment. More specifically,
the weaknesses in Broadcom's credit profile, including its
exposure to a global supply chain, have left it vulnerable to shifts
in market sentiment in these unprecedented operating conditions and Broadcom
remains vulnerable to the outbreak continuing to spread. Moody's
regards the coronavirus outbreak as a social risk under our ESG framework,
given the substantial implications for public health and safety.
Broadcom's ratings are supported by governance considerations,
specifically Broadcom's stated intention of curtailing share repurchases
to direct free cash flow to build cash or to repay debt. Broadcom
is a public company with a broad investor base and an independent board
of directors.
Moody's expects that Broadcom will maintain an excellent liquidity
profile, maintaining cash of at least $3 billion ($9.2
billion as of May 3, 2020). Liquidity is also supported by
strong cash flow generation, as Broadcom generated $5.2
billion of FCF (Moody's adjusted, after dividends of $5.x
billion) over the twelve months ended May 3, 2020. Although
near term FCF generation may weaken due to reduced end market demand,
Broadcom's flexible cost structure based on the fab-lite
manufacturing business model and large base of recurring software subscription
revenues from the Infrastructure Software business (30% of revenues
for quarter ended May 3, 2020) should allow Broadcom to generate
significant levels of FCF over the next year.
Broadcom also maintains a $2 billion commercial paper (CP) program
(immaterial amounts outstanding as of May 3, 2020). The CP
program is backstopped by Broadcom's $5 billion senior unsecured
revolver due May 2024 (fully available as of May 3, 2020),
which has same day availability with no requirement of material adverse
change representations prior to borrowings. The revolver is governed
by a single financial maintenance covenant: maximum consolidated
interest coverage ratio of 3.0x (as defined in the credit agreement).
Moody's expects that Broadcom will remain well in compliance with
this covenant.
FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:
The ratings could be upgraded if Broadcom successfully integrates Enterprise,
capturing the projected $1 billion in cost synergies, and
reduces debt to about $37 billion; maintains EBITDA margin
(Moody's adjusted) above 50%; and demonstrates a track
record of maintaining leverage below 3x debt to EBITDA (Moody's
adjusted, excluding projected cost synergies) with its acquisitions.
The ratings could be downgraded if Broadcom does not make steady progress
in reducing leverage to the low 3x level following the recovery from the
economic recession; engages in further debt-funded acquisitions
or share repurchases such that Moody's expects that debt to EBITDA
(Moody's adjusted) will remain above 3.5x; encounters
significant operating disruption with the integration of Enterprise;
or sustains a material decline in organic revenue growth.
Broadcom Inc. ("Broadcom"), headquartered in
San Jose, California, designs, develops, manufactures
and sells a broad array of analog/mixed-signal semiconductor components
for wireless communications, storage, wired infrastructure,
and industrial and automotive electronics, and, with the acquisition
of Enterprise and CA, Inc. ("CA"), provides
enterprise security software and information technology ("IT")
management software for mainframe and distributed computing systems.
The principal methodology used in these ratings was Semiconductor Industry
published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130733.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Terrence Dennehy, CFA
VP-Sr Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Stephen Sohn
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
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U.S.A.
JOURNALISTS: 1 212 553 0376
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