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Rating Action:

Moody's rates Broadcom's new Senior Notes at Baa3

13 Sep 2021

New York, September 13, 2021 -- Moody's Investors Service (Moody's) assigned a Baa3 rating to Broadcom Inc's (Broadcom) new Senior Notes due 2035 and Senior Notes due 2036 (collectively, New Notes). Broadcom intends to issue up to $5 billion of New Notes in an exchange offer for a similar principal amount of certain existing tranches of senior notes issued by either Broadcom or CA, Inc., and those senior notes co-issued by Broadcom Technologies Inc (BTI) and Broadcom Corp. (collectively, Existing Notes). The Existing Notes have maturities ranging from January 2025 to November 2030. Broadcom will use its existing cash balances to fund any premium payments on the Existing Notes that are tendered under the exchange offer.

The exchange offer is credit positive for Broadcom on a consolidated basis since it will extend the average maturity of its debt capital structure without adding incremental debt. Moreover, since BTI, Broadcom Corp., and CA, Inc are direct or indirect subsidiaries of Broadcom, the senior notes co-issued by BTI and Broadcom Corp. and those issued by CA, Inc are structurally senior to Broadcom's debt. Thus, the exchange of New Notes for these senior notes reduces the degree of structural subordination impacting Broadcom's debt. As of August 1, 2021, Broadcom's subsidiaries had $7.5 billion of unsecured debt outstanding, or about 18% of the total debt of the consolidated debt of Broadcom and its subsidiaries.

Assignments:

..Issuer: Broadcom Inc.

....Senior Unsecured Regular Bond/Debenture, Assigned Baa3

RATINGS RATIONALE

Broadcom's Baa3 senior unsecured rating reflects Moody's expectation that Broadcom will continue to produce strong financial results despite the industry-wide semiconductor supply chain challenges, while committing to maintain a conservative financial policy with leverage below 3x adjusted debt to EBITDA. As of August 1, 2021, leverage was about 2.9x debt to EBITDA (Moody's adjusted). Moody's anticipates that Broadcom will limit the use of debt to fund any large acquisition to quickly return leverage to below 3x debt to EBITDA (Moody's adjusted).

Broadcom's ratings reflect the company's considerable scale as one of the world's largest semiconductor firms. Broadcom holds leading market positions in many product areas, including certain mainframe software development tools, radiofrequency filters for smartphones, and switching and routing chips used in data centers, and home gateway chipsets. In addition, Broadcom has committed to following a conservative financial philosophy, using free cash flow (FCF) to build cash in advance of future acquisitions, which should allow Broadcom to pursue its M&A strategy while maintaining modest leverage over time. The diversified end markets, recurring revenue provided by Broadcom's large Infrastructure Software business (26% of revenues for FQ3 August 1, 2021), and fab-lite operating model will continue to provide stability to revenue and cash flows over the long term.

Still, Broadcom has made a number of largely debt-funded acquisitions over the years, which introduces integration and execution risks and periodic spikes in financial leverage. In addition, Broadcom has considerable exposure to the cyclical Semiconductor market (74% of revenues for the quarter ended August 1, 2021). Given the volatility of the Semiconductor segment, the moderately-high financial leverage limits financial flexibility.

The positive outlook reflects Moody's expectation of at least mid-single digits percent revenue growth over the next 12 months driven by content growth in 5G smartphones and continued strong demand from cloud data centers and telecom service providers. Given the anticipated growth in revenues and profits, Moody's expects that adjusted debt to EBITDA will be maintained below 3x level over the next 12 months.

Broadcom Technologies Inc's (BTI) 2017 Senior Notes (approximately $7 billion, or about 17% of total Broadcom and subsidiaries debt, as of August 1, 2021) are co-issued by BTI and Broadcom Corp. The Baa2 rating of the 2017 Senior Notes reflects the structural seniority of the BTI notes compared to the debt issued by Broadcom. The 2017 Senior Notes benefit from a downstream guarantee from Broadcom, which is BTI's parent company and the indirect parent of Broadcom Corp. Moody's expects that Broadcom will prioritize redemption of the remaining 2017 Senior Notes, which mature between 2022 and 2028 and have coupon rates varying from 2.650% to 3.875%. The exchange offer includes three tranches of the 2017 Senior Notes, with about $2.8 billion of principal subject to the offer, including the 3.125% notes due 2025, up to $1 billion of the 3.875% notes due 2027, and the 3.50% notes due 2028.

Broadcom's ratings are supported by governance considerations. Despite Broadcom's past willingness to fund acquisitions using large quantities of debt, which currently weighs on the credit profile, Moody's views positively Broadcom's stated intention to build cash in advance of future acquisitions. Over time, Broadcom may demonstrate a track record of conservative financial policies by accumulating cash to help fund acquisitions. This practice would temper the need to access the debt capital markets and thus limit spikes in financial leverage.

Moody's expects that Broadcom will maintain an excellent liquidity profile, holding cash of at least $3 billion ($11.1 billion as of August 1, 2021). Liquidity is also supported by substantial cash flows, with Broadcom generating nearly $7 billion of FCF (Moody's adjusted, after about $6 billion in dividend payments) during the twelve months ended August 1, 2021. 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 (26% of revenues for the quarter ended August 1, 2021) should allow Broadcom to produce significant levels of cash flows during periods of weak demand.

Broadcom also maintains a $2 billion commercial paper (CP) program (no amounts outstanding as of August 1, 2021). The CP program is backstopped by Broadcom's $7.5 billion senior unsecured revolver due January 2026 (fully available as of August 1, 2021). The revolver is governed by a single financial maintenance covenant: minimum 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 COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if Broadcom:

• sustains its market leadership positions in its key Semiconductor and Infrastructure Software businesses

• maintains EBITDA margin (Moody's adjusted) above 50%

• 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 adjusted debt to EBITDA to the low 3x level;

• 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 integrating acquisitions 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., provides enterprise security software and information technology management software for mainframe and distributed computing systems.

The principal methodology used in these ratings was Semiconductors published in Semptember 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287886. 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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 - Senior 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
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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