Americas Structured Equity Issue: Broadcom’s US$3.7bn three-year mandatory convertible bond

IFR Awards 2019
3 min read
Stephen Lacey

Getting Credit

Broadcom, the acquisitive semiconductor giant, turned heads with its decision in September to tap the equity-linked markets with a US$3.7bn mandatory convertible preferred offering.

The investment-grade company had pledged to fund the US$10.7bn all-cash purchase of Symantec’s enterprise business with new debt when it was agreed in August. The acquisition was part of an ongoing plan to grow the common stock dividend by double digits through acquisitions and buying back stock, so selling stock – even at a premium – seemed counterintuitive.

“We spent a lot of time with the company and its board explaining why [a mandatory] would make sense,” said Shiv Vasisht, head of equity-linked origination at Bank of America, lead-left of four bookrunners on the MCB.

“If you continue to go down the road of issuing debt for acquisitions and using free cashflow to repay debt, you are putting yourself on the precipice of a ratings downgrade. How about being front-footed around trying to shore up your balance sheet?”

Broadcom was just in the realm of investment grade (Baa3/BBB-/BBB-), and Moody’s had put it on watch for potential downgrade after the Symantec acquisition. Moody’s would label the MCB a “credit positive” in removing its watch for downgrade.

Broadcom’s MCB is a big deal for the equity-linked market, not just in size but precedent.

To prep investors for the change in funding strategy, Broadcom management confidentially marketed the deal for two days to build support, not only equity and equity-linked investors but credit investors as well. That effort provided confidence to conduct the MCB offering overnight rather than be exposed for an additional day of public marketing as originally planned.

BofA, Citigroup, JP Morgan and Morgan Stanley, later joined by six additional bookrunners, launched overnight marketing at US$3bn sizing and talk of 7.625%-8.1.25% dividend and fixed US$330 conversion price, a 16.9% premium to the closing reference. They bumped the base offering size to US$3.25bn on pricing at an 8% dividend, a 425bp pick-up over the 3.75% dividend on the underlying shares, with exercise of the greenshoe pushing total sizing to US$3.7bn.

Broadcom shares fell 2.3% the day after pricing the MCB to US$275.77.

“A lot of companies of this ilk are looking at the mandatory product as a way to achieve this objective,” said BofA’s Vasisht.

Broadcom’s MCB was the largest equity-linked raise in three years, one of the five largest MCBs ever, and the largest-ever equity-linked raise by a tech company. At a US$108bn market cap (now US$124bn), Broadcom is also the third-largest company ever to tap the US CB market, behind only Microsoft and Alibaba.

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