(Bloomberg) -- Bond traders have ramped up measures of credit risk associated with Broadcom Inc. as it backstops mega financing packages for the buildout of artificial intelligence.
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The yields on Broadcom's 5.15% bonds that mature in 2031 rose about 14 basis points so far in August. The price of its five-year credit default swaps, meanwhile, climbed 28 basis points over the same period — a larger amount than both Oracle Corp. and SpaceX.
Broadcom is in talks to raise more than $60 billion in debt for an AI chip financing deal that is expected to benefit Anthropic PBC and other companies. While the proposal is still being ironed out, Broadcom could potentially guarantee a portion of a senior-secured tranche.
That's after it struck an agreement earlier this year to backstop most of a $35 billion debt package while investors including Apollo Global Management Inc. and Blackstone Inc. financed the purchase of custom AI chips to lease to Anthropic.
"The rise in Broadcom's CDS seems to me is more specific to their balance sheet than overall angst over AI investment," said Tony Trzcinka, investment grade portfolio manager at Impax Asset Management, adding it was likely related to expectations of additional financial guarantees by Broadcom for chip-financing deals.
The use of guarantees and other forms of financial support have gained pace this year as tech companies invest billions to expand cloud-computing capacity. Under these agreements, chipmakers like Broadcom or Nvidia Corp. are effectively lending the strength of their balance sheets to their clients to boost their purchasing ability.
This is raising concerns that risks are accumulating that are not visible on the balance sheets of these companies and that, in an industry downturn, similar backstops could force them to honor billions in pledges when their own earnings are under pressure.
"This adds to recent concerns around the growing layer of 'phantom leverage' growing underneath the vast AI ecosystem as the backlog of leases, purchase commitments, residual value guarantees and other backstops is poised to stretch into the trillions," Tarek Hamid, a strategist at JPMorgan Chase & Co., wrote in a note on Monday, in reference to Broadcom's potential $60 billion financing deal.