Concerns Over Debt Risk Prompt Bank of America to Downgrade Broadcom Credit Rating to Neutral

Broadcom's fundamentals remain robust, but the potential credit risks stemming from the XPV platform are emerging as a new variable for bond investors.

Bank of America Securities has downgraded Broadcom's credit rating from "Buy" to "Neutral." The firm believes that the XPV platform, jointly established by Broadcom, Blackstone, and Apollo, still carries significant uncertainty. As the platform scales up, related risks may continue to exert pressure on Broadcom's bond spreads.

In a report released on August 10, Bank of America analyst Tom Curcuruto pointed out that since early June, the spread of Broadcom's bonds relative to other A-rated semiconductor peers has widened by approximately 20 to 30 basis points. Currently, the spreads for Broadcom's 4.95% bonds maturing in 2036 and 5.7% bonds maturing in 2056 are 105 basis points and 118 basis points, respectively, which is 30 to 45 basis points higher than those of non-AI semiconductor companies such as Texas Instruments and Qualcomm.

From Bank of America's perspective, current spreads have largely priced in the credit uncertainty brought by XPV, leaving limited room for further tightening. However, the bank simultaneously raised its fiscal 2026 revenue and EBITDA forecasts for Broadcom by 10% and 13%, respectively, indicating that its assessment of the company's operational fundamentals remains positive.

XPV Expansion Puts New Credit Pricing Pressure on Broadcom

The XPV platform was announced by Broadcom, Blackstone, and Apollo in June this year. The initial transaction volume is approximately $35 billion, involving over 1 GW of XPU chips leased by Anthropic under a five-year lease agreement. The platform is primarily financed through secured debt, with debt maturities matched to the chip lease terms, and plans to expand to 20 GW by 2028.

Bank of America identifies two underlying risks associated with XPV: First, there is no mature secondary market for XPU chips, and the product types are relatively homogeneous, leading to uncertainty in asset residual values. Second, lessees are highly concentrated, currently relying mainly on Anthropic. While OpenAI is a potential partner, other lessees have not yet been determined.

The report notes that the pressure XPV places on Broadcom's credit quality is transmitted through two main channels: On one hand, investors may partially look through the financing risks of XPV to the parent company, Broadcom. On the other hand, investors may hedge related risks by buying Broadcom CDS, further technically widening its bond spreads.

As the scale of XPV continues to expand, these pressures may persist in the long term. Even if Broadcom's own profitability and cash flow remain strong, its bond spreads may still face pressure due to the risk premium associated with XPV.

RVG Exposure Far Below Extreme Loss Caps

Broadcom does not directly provide financing in XPV transactions but instead provides a backstop for most of the debt through Residual Value Guarantees (RVG).

Broadcom previously disclosed that the maximum loss exposure for senior debt corresponding to the initial $35 billion in XPU assets is $29 billion, assuming 100% default and zero recovery of collateral.

Bank of America employed a stricter stress test model, assuming phased disbursement of financing, five-year amortization of debt, a 20% annual decline in chip prices, and an additional 25% price shock in the event of default. The calculations show that the peak RVG exposure for the initial transaction is approximately $26 billion, expected to occur in September 2027, corresponding to a maximum loss of about $2.9 billion.

If XPV expands to 20 GW at a rate of 2 GW per quarter, Bank of America estimates that Broadcom's maximum RVG exposure could reach $370 billion by mid-2029. In a 100% default scenario, the maximum loss would be approximately $42 billion; if the default rate is 25%, the loss would be about $10.5 billion.

However, Bank of America emphasizes that a 100% default rate is an extreme and unrealistic assumption. Broadcom's post-dividend free cash flow in 2027 is projected to reach $85 billion. Even in the event of the aforementioned extreme losses, the company retains strong loss-absorption capacity. Therefore, from a credit risk perspective, XPV currently remains within a controllable range.

Under Extreme Stress, Broadcom's Leverage Remains Within Investment-Grade Territory

Bank of America conducted further stress tests on Broadcom's leverage levels.

In the base case scenario, Broadcom's total leverage ratio is expected to decrease from 0.8x in 2026 to 0.4x in 2028, while the net leverage ratio turns negative, primarily driven by strong free cash flow.

In an extreme stress scenario, if XPV experiences large-scale defaults resulting in collateral shortfalls, and all AI-related EBITDA is excluded, Broadcom's adjusted total leverage ratio would rise to approximately 2.2x between 2027 and 2028.

If it is further assumed that the relevant chips cannot be sold, Broadcom is forced to consolidate all XPV-related debt onto its balance sheet, and no share buybacks are conducted during this period, the net leverage ratio could rise from the current approximately 0.9x to about 3x by the end of 2028.

Bank of America believes that this stress test demonstrates that XPV itself is not sufficient to shake Broadcom's credit foundation. However, as the platform scales up rapidly, the company needs to exercise greater caution in controlling potential guarantee exposures and leverage levels.

Uncertainty Persists Among Rating Agencies; Broadcom May Need to Enhance Disclosure

Broadcom currently holds investment-grade ratings of A3/A-/A-. Bank of America believes that it is precisely this strong credit profile that enables Broadcom to participate in XPV financing and provide residual value guarantees.

However, there is still uncertainty regarding how rating agencies will treat RVG exposures. According to Bank of America, S&P currently leans towards treating RVG as debt preliminarily, but whether it will shift to a scenario analysis framework as XPV scales up remains to be seen.

Bank of America believes that the positive outlooks Broadcom has received from the three rating agencies are at risk of being downgraded. Meanwhile, as XPV continues to expand, the market and rating agencies may require Broadcom to provide further disclosure on related guarantee arrangements, including whether relevant liabilities need to be recognized on the balance sheet.

Bank of America expects that Broadcom may provide more details when it releases its earnings report in early September.

Fundamentals Remain Strong, but Bond Valuation Is Largely Priced In

The credit uncertainty brought by XPV has not changed Bank of America's optimistic view of Broadcom's fundamentals.

Bank of America expects Broadcom's revenue to increase from $63.9 billion in fiscal 2025 to $105.9 billion in fiscal 2026, and further rise to $168.2 billion in fiscal 2027. Free cash flow is projected to increase from $26.9 billion to $97.9 billion.

Against this backdrop, Bank of America believes that Broadcom's current bond spreads have sufficiently reflected XPV-related risks, leaving limited room for further excess returns. Therefore, it has downgraded the credit rating from "Buy" to "Neutral."

In the future, a slowdown in XPV expansion, favorable developments in platform risks, or more aggressive deleveraging measures by Broadcom could serve as catalysts for a rating upgrade. Conversely, significant counterparty risk events in XPV or more aggressive shareholder return policies by Broadcom could further elevate credit risks.