Broadcom credit rating cut to Marketweight on XPV concerns

Investing.com -- Bank of America downgraded Broadcom's issuer and bond ratings to Marketweight from Overweight on Tuesday due to uncertainty surrounding the XPV platform established with Blackstone and Apollo.

The bank views the bonds as fairly valued at 30-45 basis points wide to non-XPU A-rated semiconductor companies, which have trailed semiconductors by approximately 20-30 basis points since early June. Broadcom maintains 1.3 times gross leverage with revenue and free cash flow projected to grow 3-4 times from fiscal year 2025 to fiscal year 2028.

BofA expects credit spreads will face pressure as the XPV platform expands, partly from perceived credit risk but mainly from unfavorable spread technicals as investors potentially look through XPV financings to Broadcom on ultimate parent risk or hedge through credit default swaps. Key uncertainties include end-customer concentration, the amount and features of future financings, and the extent and pace of growth in the XPV platform.

The XPV platform announced by Broadcom, Blackstone and Apollo started with a 1GW-plus tranche valued at $35 billion, with XPUs leased by Anthropic, and plans to expand to 20GW through 2028. Broadcom provides a backstop residual value guarantee on a majority of the debt financing and estimates the senior debt on the initial $35 billion XPU tranche has a maximum loss exposure of $29 billion.

BofA modeled the funding ratably over 16 monthly rounds, assuming 5-year debt amortization, 20% price declines over 5-year chip life, and a 25% price shock at default at each point over the lease life. The bank estimates maximum RVG exposure peaks at $26 billion in September 2027 and maximum loss exposure of $2.9 billion.

Adding subsequent 2GW deals on a quarterly basis, maximum RVG across the 20GW reaches $370 billion in mid-2029, with maximum loss exposure of $42 billion at 100% default and $10.5 billion at 25% default rate assumption.

BofA raised 2026 revenue and EBITDA estimates by 10% and 13% to reflect earnings and guidance. The bank expects more clarity with results in early September.

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