Broadcom (AVGO.US) “underwriting” huge AI financing raises market concerns, credit risk indicators rise, Wall Street warns that “invisible leverage” is being accumulated

CDS is commonly used by the market to measure corporate credit risk. The price increase means investors need to pay more to hedge against Broadcom's default risk, and it also reflects that the market is demanding higher risk compensation.

The rise in credit risk indicators comes at a time when Broadcom is preparing to participate in a larger AI infrastructure financing plan. According to previous reports, Broadcom is in negotiations with a number of financial institutions to raise more than 60 billion US dollars in debt for an AI chip financing transaction. AI companies such as Anthropic are expected to be the main beneficiaries. Currently, the specific financing structure is still under discussion, but Broadcom may provide credit guarantees for some of these advanced guaranteed debts.

This is not the first time that Broadcom has supported customers to purchase AI chips through its own credit strength.

Earlier this year, Broadcom already provided most of its credit support for another financing plan of around $35 billion. In the deal, investors, including Apollo Global Management and Blackstone Group (BX.US), funded the purchase of Broadcom's custom AI chips and then leased the relevant equipment to Anthropic for use.

This financing model can help AI companies obtain a large number of chips needed to build data centers, while using Broadcom's balance sheets and credit ratings to reduce financing costs.

Tony Trzcinka, investment grade bond portfolio manager at Impax Asset Management, believes that the recent rise in Broadcom's CDS price is more likely to reflect market concerns about the company's own balance sheet risk, rather than investors generally losing confidence in the overall AI investment boom. He said this change may be related to the market's expectation that Broadcom will provide additional financial guarantees in more chip financing transactions in the future.

Similar guarantee and credit support arrangements have increased markedly this year as technology companies invest hundreds of billions of dollars to build AI data centers.

In such deals, chip vendors such as Broadcom or Nvidia (NVDA.US) are actually providing customers with strong balance sheets and credit capabilities to help them obtain more financing and expand the scale of chip purchases.

For chip companies, this model can directly stimulate product sales; for AI companies, computing infrastructure can be obtained quickly without immediately investing all capital. However, as the scale of transactions grew larger, the hidden potential risks also began to attract the attention of bond investors.

One of the biggest concerns of the market is that some of the risks may not be directly reflected in corporate debt in the traditional sense. In addition to clear debt guarantees, AI infrastructure financing systems also include long-term lease contracts, chip procurement commitments, equipment residual value guarantees, and other forms of credit support.

Under normal circumstances, these arrangements may not put significant pressure on chip companies' cash flows, but if the AI industry experiences a sharp decline in the future, customer business conditions deteriorate, or even unable to fulfill payment obligations, the company providing the guarantee may need to fulfill the relevant commitments.

At that time, companies such as Broadcom may also need to assume potential payment obligations of billions of dollars or more when their own profits are also impacted by the downturn in the industry.

J.P. Morgan strategist Tarek Hamid said in a report on Monday in response to Broadcom's potential $60 billion financing deal that further heightens the market's concerns about the “invisible leverage” that continues to accumulate within the huge AI ecosystem. He pointed out that as leasing contracts, procurement commitments, surplus value guarantees and other credit support arrangements continue to increase, the scale of related potential obligations could reach trillions of dollars in the future.

This also means that the financial risks brought about by AI infrastructure construction may be far greater than the amount of debt directly shown in corporate financial statements.

Overall, the bond market is currently not questioning the growth prospects of Broadcom's core AI business, but is beginning to re-evaluate the company's potential financing risks to promote AI chip sales. From the previous financing arrangement of around $35 billion to the more than $60 billion in new deals currently being discussed, Broadcom is increasingly using its balance sheet to provide credit support to AI customers.

As the scale of AI data center investment continues to expand, this model can help Broadcom further expand chip sales, but recent increases in bond yields and CDS prices also indicate that the credit market has begun to demand higher risk compensation. The extent to which Broadcom actually guarantees these financing projects in the future and whether these potential obligations will be further increased will be an important focus for bond investors to assess the company's credit risk.

As of Monday's close, Broadcom's stock price closed down 2.63% to $358.76.