Broadcom borrows big for deal

Broadcom Ltd. has lined up as much as $106 billion of debt financing to back its proposed acquisition of Qualcomm Inc., winning what would be the biggest corporate loan on record at a precarious time for credit markets.

As much as $100 billion of the funding would be provided by a group of 12 lenders including Bank of America and JPMorgan Chase, Broadcom said in a statement Monday, a record loan financing. The banks provided a firm commitment to fund the deal, a step up from their previous agreement that allowed them to back out if markets were seizing up.

Now banks appear to be on the hook for the funding if the deal goes through, just as credit markets are showing early signs of strain. The U.S. junk bond markets just had their worst week in two years, and investment-grade corporate debt has been weakening all year, according to Bloomberg Barclays indexes. Broadcom is rated one step above speculative grade.

"These big blowout kind of financings usually signal we're at the end of something, perhaps a big cycle for [mergers and acquisitions] debt in this case," said Noel Hebert, an analyst at Bloomberg Intelligence.

Broadcom would have to work hard to make sure it remains investment grade, because with junk ratings, "it'd get ugly quick," Hebert said.

Broadcom first made an offer to buy Qualcomm for $105 billion in November that was rejected swiftly by the target company. That deal was backed by a financing package that hinged on a "highly confident" letter, where lenders have leeway to back out if markets seize up.

At the time, Moody's Investors Service said the offer was a negative for Qualcomm's credit quality, which at A1 is solidly investment-grade. The proposed terms for the acquisition and the additional debt required to complete the deal would likely result in the target's rating being cut by "multiple notches," the bond grader said.

Chief Executive Officer Hock Tan said the new $121 billion bid is the company's "best and final." Buying Qualcomm would make Broadcom the leader in smartphone chips, and the third-biggest chipmaker globally. Qualcomm is dominant in chips connecting handsets to wireless networks, while Broadcom has expertise in chips linking devices to Wi-Fi networks.

Qualcomm shareholders will vote on the future of the takeover bid next month when they decide whether to replace the company's board with Broadcom's nominees. On Thursday, San Diego-based Qualcomm said the new offer "materially undervalues" the company.

The acquisition would make good strategic sense for Broadcom, which means bond investors might be willing to finance it, said Todd Schomberg, an investment grade portfolio manager at Invesco Ltd. in Atlanta. This deal is not like the mega-leveraged-buyouts of the mid-2000's, he said.

"These deals seem to be different -- there's a larger equity component and a telegraphed desire to remain investment-grade rated," Schomberg said.

The financing package includes $100 billion of bank loans, including a $5 billion revolving credit facility. The other banks providing the debt commitment are: Citigroup Inc., affiliates of Deutsche Bank AG, Mizuho Financial Group Inc., Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc., Wells Fargo & Co., Bank of Nova Scotia, Bank of Montreal, and Royal Bank of Canada and Morgan Stanley.

Business on 02/13/2018

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