The Long and Short
AVGO exchange offer to further improve maturity profile
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Broadcom Inc. (AVGO) announced a $5 billion exchange offer after the close on March 15, 2021 across two different pools of notes. The exchange helps to improve AVGO’s maturity profile by smoothing out maturity walls in 2024 through 2027. Across those four years, AVGO has a total of $17.25 billion of debt maturing, representing just over 41% of the company’s total debt. This marks the second tender/exchange offer this year, as the company remains focused on maturity profile improvement.
The company is looking to offer holders an early participation incentive of $50 per $1,000 notional to participate in the exchange by March 26, 2021 (5pm NYC time). AVGO is likely using a large incentive payment, compared to the standard of $30 per $1,000 notional, to entice more holders to participate. Depending on the pool, holders will exchange into either new 2033 or 2034 notes. Additionally, AVGO will pay holders who participate 100% of the premium of their existing bonds in cash. Each pool of notes will be accepted in accordance with the acceptance priority levels (Exhibit 1). In January, AVGO had tendered for just over $3.0 billion (including premiums) of notes maturing from 2021 through 2023. This helped AVGO to extend its weighted average debt maturity to roughly nine years from six, as the company issued new notes with maturities ranging from seven years to thirty years to fund the tender.
Exhibit 1. AVGO Exchange Offer
*Fixed spread includes early participation payment of $50 per $1,000 notional
Source: Company Report; Amherst Pierpont Securities
M&A Supports Growth – Recurring Revenues Support Cash Flow Predictability
AVGO has a long history of acquiring profitable semiconductor and infrastructure software firms with solid organic growth prospects. This has led to strong annual top line, EBITDA and free cash flow growth. As such, AVGO boasts one of the highest EBITDA margins amongst its peers. We note that AVGO ended FY20 with an EBITDA margin of just over 57%, which compares favorably to higher rated peers such as Qualcomm Inc. (QCOM – A2/A-) and Analog Devices Inc (ADI – Baa1/BBB (*+)), whom ended fiscal year 2020 with EBITDA margins of 33% and 54%, respectively. Over the past few years, AVGO acquired both CA Technologies and Symantec’s enterprise security business which launched them into the software business. A recent focus on software acquisitions has increased the company’s recurring revenue profile given the maintenance revenues associated with software sales. Infrastructure software now accounts for nearly 35% of the top line with a substantial portion of those revenues recurring in nature. In fact, in the most recent fiscal quarter, management noted that over 90% of new software bookings were recurring (subscription and maintenance). Bookings (in dollar terms) continue to outpace expiring contracts, which is expected to produce mid-single digit organic top line growth annually in the software unit.
Exhibit 2. AVGO Annual Financial Data (FY16-FY20)
Source: Company Report
Commitment to IG Ratings
Given AVGO’s acquisition growth strategy, management has noted that its access to the IG credit market is a key component to its strategy. AVGO generates strong free cash flow and despite its roughly 50% cash flow dividend payout ratio, it still provides AVGO with substantial cash to delever rapidly post acquisition. Additionally, AVGO has a strong cash balance of $9.6 billion. On a LTM basis ended 1/31/21, AVGO generated $11.6 billion in free cash flow and paid $5.7 billion in dividends. Street estimates for fiscal year 2021 put free cash flow in the $12.6 billion range. Management has noted that if by end of this calendar year they have not found an acquisition that fits its IRR profile, they will look to further repay debt and/or look to repurchase shares. Total leverage of 3.1x remains under the rating agencies’ 3.5x threshold. On a net basis leverage is roughly 2.4x. Without any further debt reduction, AVGO’s total leverage is forecast to decline to the 2.6x area due to strong EBITDA growth as street estimates have AVGO’s FY21 EBITDA growth at 16% currently.
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