Broadcom lines up biggest debt financing ever to get Qualcomm

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 M&A debt in this case,” said Noel Hebert, an analyst at Bloomberg Intelligence. The transaction comes as the Federal Reserve is tightening the money supply, which often makes investors less willing to take risk.

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.

Debt investors feared the same, dumping bonds of both companies. A spokesman for Moody’s said the funding commitment does not change its view on Qualcomm’s credit.

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-leveragedbuyouts of the mid-2000s, he said.