October 10, 2017 / 3:50 PM / 11 days ago

Fitch Affirms Broadcom Cayman Finance Ltd at 'BBB'; Outlook Positive

(The following statement was released by the rating agency) CHICAGO, October 10 (Fitch) Fitch Ratings has affirmed Broadcom Limited's (Broadcom) wholly-owned subsidiary, Broadcom Cayman Finance Ltd.'s Long-Term Issuer Default Rating (IDR) at 'BBB'. Fitch has also assigned a 'BBB' rating to the proposed benchmark sized multi-tranche offering of senior unsecured notes. The Rating Outlook remains Positive. The rating actions also affect $13.6 billion of outstanding senior unsecured notes. Broadcom has announced it will issue senior unsecured notes, the net proceeds from which Fitch expects the company will use along with cash on hand to fund the previously announced acquisition of Brocade Communications Systems Inc. (Brocade) or if the Brocade acquisition is not completed, for general corporate purposes, including any future acquisitions. Fitch expects the Brocade acquisition will close in November 2017. KEY RATING DRIVERS Increasing End Market Diversification: Fitch expects that increasing revenue diversification, including after the Brocade acquisition, will reduce long-term operating volatility. Broadcom has increased its premium FBAR filter content in new handset releases at key customers. In addition, increased sales from longer-cycle products, including broadband and set-top boxes, will reduce volatility associated with handset product cycles or model ramps. Following the Brocade acquisition, enterprise storage revenue will increase to approximately 20% of total revenue compared with the mid-teens currently, further diversifying overall revenue. Strengthening FCF Profile: Fitch expects Broadcom's FCF profile to strengthen from greater scale, reduced operating volatility and structurally higher profitability. In addition, Fitch expects capital spending will return to normalized levels (in the low-to-mid-single digits) upon completion of campus construction and replacing six-inch wafers with eight-inch wafers in the company's Fort Collins fabrication facility. Fitch expects $2.5 billion to $3.5 billion of annual FCF (post dividend) through the intermediate term, versus $2 billion for fiscal 2016. Event Risk from Acquisitions: Fitch expects Broadcom will remain acquisitive but fund incremental deals with cash flow and available cash. Broadcom has guided to using half its pre-dividend FCF for dividends and the other half for acquisitions. Fitch anticipates larger deals could be partially debt-financed but that the company would use subsequent FCF and profitability growth to return total leverage closer to 2x. At the same time, fewer large targets exist after several years of significant semiconductor industry consolidation. Strong Market Positions: Fitch believes Broadcom's leading market positions in FBAR filters for handsets, and wired infrastructure markets, including ethernet switching, fibre optic components and set-top boxes, will drive less volatile operating results. With the Brocade acquisition (expected to be completed by the end of November 2017), Broadcom gains a leading and comprehensive platform of components for enterprise storage. Fitch believes the company's commitment to high research and development (R&D) investment is supporting technology leadership and solid profit margins across its product portfolio. Public Financial Policies: Broadcom's publicly articulated financial policies are conservative and in Fitch's view increasingly in line with strong investment grade ratings. Fitch believes Broadcom remains committed to its 2x leverage target and growing its dividend, which could approach $1.7 billion for fiscal 2017. In addition, the company has articulated a commitment to maintaining $3 billion of cash on the balance sheet (nearly all readily available). DERIVATION SUMMARY Fitch expects continued strong performance from Broadcom through the forecast period, underscored by consistent revenue growth from an increasingly diversified set of end markets and expanding profitability from operating leverage and continued technology leadership. The company's strengthening FCF profile should enable it to pay out substantial dividends to shareholders and organically fund acquisitions over the forecast period. The Positive Outlook incorporates Fitch's expectation that the company's credit will continue strengthening, including upon completion of the Brocade acquisition. Fitch expects Broadcom compares favorably with higher 'BBB' rated peers (and increasingly lower 'A' rated peers), given operating EBITDA margins in the mid-40s and FCF margins in the mid-teens. The company's commitment to sustaining total leverage at or below 2x and FCF to debt over 20% will put Broadcom at least in line with lower rated 'A' category peers. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Low to mid-single digit long-term revenue growth but low teens growth in fiscal 2018 from the addition of Brocade and strong wireless demand from the company's North American handset customer. --Operating EBITDA margins of 46.7% for fiscal 2017 and 47% through the forecast period from the addition of accretive Brocade, full realization of cost synergies from legacy Broadcom and operating leverage. --Growing pre-dividend FCF from higher profitability and completion of campus construction in the near term, which should return capital expenditure to the low- to mid-single digits as a percentage of revenue. --Broadcom uses half of pre-dividend FCF for dividends and the other for acquisitions. RATING SENSITIVITIES Positive rating action could occur upon completion of the Brocade aquisition, provided Fitch expects: --Broadcom can sustain total leverage near 2x in the near term, driven by operating EBITDA growth from higher revenue and cost synergies related to the legacy Broadcom and Brocade acquisitions; or --Structurally higher FCF is sufficient to organically fund incremental acquisitions. Negative rating action could occur if Fitch expects: --Total leverage to remain closer to 3x, likely from serial debt-financed acquisitions or the initiation of more aggressive shareholder returns; --Material share losses resulting in negative revenue growth and lower operating EBITDA margin resulting in annual FCF insufficient to sustain target total leverage. LIQUIDITY Fitch believes Broadcom's liquidity was solid as of July 30, 2017 and supported by: --$5.4 billion of cash and cash equivalents; --$500 million undrawn revolving credit facility (RCF) expiring 2021; the RCF will be terminated in connection with the issuance of the new senior unsecured notes. Fitch's expectation for $2.5 billion to $3.5 billion of annual FCF also supports liquidity. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Broadcom Cayman Finance Limited --Long-Term IDR at 'BBB'; --RCF at 'BBB'; --Senior unsecured notes at 'BBB'. Fitch has assigned the following rating: --Senior unsecured notes 'BBB'. The Rating Outlook is Positive. Contact: Primary Analyst Jason Pompeii Senior Director +1-312-368-3210 Fitch Ratings 70 West Madison Street Chicago, IL 60602 Secondary Analyst Alen Lin Senior Director +1-312-368-5471 Committee Chairperson David Peterson Senior Director +1-312-368-3177 Summary of Financial Statement Adjustments: There were no financial statement adjustments that depart materially from those contained in the published financial statements of Broadcom Limited. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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