Exclusive: Broadcom lines up $6.5 billion bridge loan for Brocade buy

By Michelle Sierra

NEW YORK (Reuters LPC) - Six banks will be providing a US$6.5bn financing backing chipmaker Broadcom's acquisition of Brocade, a maker of networking switches, software and storage products, two sources familiar with the financing said.

Bank of America Merrill Lynch (BAML), Deutsche Bank, Barclays, Bank of Montreal, Citigroup and Credit Suisse have signed on to the 364-day unsecured bridge loan, the sources said.

The all-cash transaction, valued at approximately US$5.5bn, plus US$400m of debt, is the latest in a burst of merger activity in the last two weeks that will help lift U.S. investment banking fee incomes from four-year lows.

The six banks will hold the loan until the bridge is replaced with permanent financing by April 2017, the expected closing of the merger, the sources said. The final capital structure will depend on the corporate ratings the company receives by then, and whether it is upgraded to investment grade.

Moody’s Investors Service has Broadcom at Ba1 with a positive outlook, while S&P has the company at BB+, only one rating below investment grade.

Following the acquisition, Fitch assigned a BBB- rating to Broadcom, the first investment grade ratings tier.

Banks stand to earn US$25m to US$35m on the bridge, according to Freeman Consulting Services.

In the last two weeks, US$66.1bn in acquisition-backing bridge loans has accumulated, according to Thomson Reuters LPC preliminary data. A dry spell in the mergers and acquisitions (M&A) arena through most of this year has sapped bank fee income.

As of November 8, the US$33bn in year-to-date total U.S. investment banking fee income, which includes M&A advisory fees, equity and bond underwriting fees, as well as syndicated loan arranging fees, is down 17.5% from the same period last year and the lowest since 2012, according to Freeman Consulting.

Singapore-based Broadcom, formerly Avago Technologies, said November 2 it is paying US$12.75 per share, and expects to fund the transaction with new debt financing and cash available on the balance sheet. Brocade is based in California.

CHIPMAKER CONSOLIDATION

The tie-up is the latest in a shrinking chip sector, and will allow Broadcom to corner a larger share of the data center products market by using Brocade's fiber channel switches that speed up data transfer between servers and storage devices, according to Reuters.

The chip industry is becoming more concentrated as companies try to capture market share, much of it related to connected devices and cars, and Avago/Broadcom has been one of the sector's most prolific acquirers.

Avago, a maker of semiconductors for phones, cars and the defense industry, purchased Broadcom in 2015 and adopted the target name.

In the biggest chip deal ever, smartphone chipmaker Qualcomm Inc announced October 27 it would buy NXP Semiconductors NV for about US$38bn, making it the leading supplier to the fast-growing automotive chips market, Reuters reported.

BAML, Citi, Credit Suisse and Deutsche Bank declined to comment. Barclays and Bank of Montreal spokespeople did not immediately return calls. Broadcom and Brocade did not immediately return calls.

(Additional reporting by Lynn Adler and Jonathan Schwarzberg.)

(Reporting by Michelle Sierra; Editing by Jonathan Methven and Lynn Adler)