Broadcom Credit Risk Soars on Mega AI Debt Financing Backstops

Bond traders have heightened measures of credit risk linked to Broadcom Inc. as it guarantees substantial financing packages for the deployment of artificial intelligence. Amidst this, Canadian consumers anticipate economic hardships due to 50% US tariffs commencing. A prolonged trade conflict between the US and Canada may linger past midterm elections.

Bessent remains uncertain about resolving the underlying cause of rising yields. Broadcom's 5.15% bonds maturing in 2031 saw a 14 basis point increase in yields during August. Meanwhile, the price of its five-year credit default swaps surged by 28 basis points over the same timeframe, surpassing those of Oracle Corp. and SpaceX.

Discussions are underway for Broadcom to raise over $60 billion in debt for an AI chip financing deal expected to benefit Anthropic PBC and others. Although still in negotiation, Broadcom might potentially guarantee a portion of a senior-secured tranche. This comes after a deal earlier this year to backstop nearly $35 billion in debt, with investors such as Apollo Global Management Inc. and Blackstone Inc. financing the acquisition of custom AI chips for leasing to Anthropic.

The spike in Broadcom's CDS appears more specific to their balance sheet than general worries over AI investments, according to Tony Trzcinka, an investment grade portfolio manager at Impax Asset Management. He attributes it to expectations of additional financial guarantees by Broadcom for chip-financing deals. Guarantees and other financial support have grown more prevalent this year as tech firms invest billions to expand cloud computing capabilities.

These agreements enable chipmakers like Broadcom or Nvidia Corp. to leverage their balance sheets, providing clients with enhanced purchasing power. This raises apprehensions about accumulating risks not visible on these companies' balance sheets, potentially compelling them to honor billions in pledges during an industry downturn when their earnings are under strain.

This adds to recent concerns over the burgeoning layer of 'phantom leverage' underlying the expansive AI ecosystem, as the backlog of leases, purchase commitments, residual value guarantees, and other backstops is projected to reach trillions, as noted by Tarek Hamid, a strategist at JPMorgan Chase & Co., in reference to Broadcom's potential $60 billion financing deal.