Fitch assigns BBB rating to Broadcom’s senior notes issue

Investing.com -- Fitch Ratings has assigned a ’BBB’ rating to Broadcom (NASDAQ:AVGO) Inc.’s proposed senior notes issue, according to a statement released Monday.

The notes will rank equally with Broadcom’s existing and future senior unsecured obligations. The company plans to use the proceeds for general corporate purposes, which may include organic investments, debt repayment, and acquisitions.

Fitch highlighted Broadcom’s strengthened financial flexibility, driven by strong demand for artificial intelligence (AI) and VMware’s virtualization products. The rating agency expects free cash flow (FCF) to be higher and more stable due to the increasing mix of recurring maintenance and support revenue from the software portfolio, which doubled to 42% in fiscal year 2024 from FY23 following the VMware acquisition.

The rating agency forecasts $15 billion-20 billion of annual FCF, giving Broadcom expanded capacity for capital returns and acquisitions without weakening its balance sheet.

Fitch expects Broadcom’s EBITDA leverage to remain below 2.0x over the longer term, with only temporary increases to accommodate partly debt-funded acquisitions. The company is expected to structure acquisition funding to return EBITDA leverage within rating sensitivities in the 12-24 months after deal closings.

Broadcom’s revenue profile has strengthened from prior years, according to Fitch. The expansion of its hyperscaler customer base due to robust demand for AI infrastructure build-outs is expected to drive long-term revenue growth, though potential excess capacity at customers presents a medium-term risk.

The company maintains industry-leading profit margins, with Fitch expecting EBITDA margins of approximately 60% through the forecast horizon.

Fitch’s key assumptions include high-teens organic revenue growth in FY25, moderating to mid-single-digit growth in FY26-FY27, stable profit margins, and excess cash used for share repurchases.

Factors that could lead to a downgrade include expectations of EBITDA leverage above 2.5x beyond 12-24 months following an acquisition or organic revenue declines. A potential upgrade could result from EBITDA leverage sustained below 2.0x and continued end-market diversification.

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