AVGO – Base Case iCDS 47bps, Negative Case iCDS 57bps, 2027 3.875% Bond YTW of 5.834%, iYTW of 4.304%, Baa3 Rating from Moody’s, IG3- (equivalent to A3) Rating from Valens, Low Refinancing Need
October 12, 2022
- Credit markets may be materially overstating AVGO’s credit risk with a YTW of 5.834% relative to an Intrinsic YTW of 4.304% and an Intrinsic CDS of 47bps. Furthermore, Moody’s is overstating AVGO’s fundamental credit risk with its Baa3 credit rating three notches below Valens’ IG3- (A3) credit rating.
- Incentives Dictate Behavior™ analysis highlights mostly negative signals for credit holders. AVGO’s metrics should drive management to focus on expanding margins and fueling growth, which could lead to Uniform ROA expansion. However, creditors may be concerned about management’s potential overleveraging of the firm’s balance sheet to finance growth since elevated interest expenses would not hurt their total compensation. While most management members are not material owners of AVGO equity relative to their annual compensation, CEO Tan’s significant holdings indicate he can influence other NEOs to align with shareholders for long-term value creation. Meanwhile, most management members have high change-in-control compensation, implying they are likely to accept a buyout or pursue a sale of the company. That said, given the scale of the firm, particularly following its VMWare merger, management would be hard-pressed to find a likely suitor, limiting event risk.
