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Inside Broadcom’s Bold Move to Boost Demand for Its Chips

When Broadcom last week announced a funding venture with Apollo and Blackstone to pay for a gigawatt of computing capacity to be used by Anthropic, it looked like the latest in a series of AI computing deals funded by private equity. Behind the scenes, however, the deal represents a risky move by Broadcom to boost demand for its chips.

While the announcement didn’t spell out Broadcom’s role, the company—which works with tech firms such as Google to design their AI chips—is providing a key financial backstop for the $35 billion order of chips. In doing so, it is following in the footsteps of Nvidia, which has employed similar vendor financing techniques to accelerate its own chip sales. But Broadcom doesn’t have Nvidia’s deep pockets, making it a bigger gamble.

Indeed, as recently as March, Broadcom CEO Hock Tan was reluctant to use Broadcom’s balance sheet to provide such a backstop, according to a person who spoke with Broadcom executives. But he changed his mind. Broadcom approached Morgan Stanley for help finding a way to finance chip sales while limiting the debt it must add to its balance sheet, said a person involved in the transaction.

Tan had reason to be cautious. Broadcom generates a fraction of the cash produced by Nvidia, which has provided similar backstops. Broadcom also had $65 billion of debt and just $19.6 billion of cash as of May 3, it reported earlier this month.

But if Broadcom didn’t take this step, it was at risk of getting left behind in the AI chip race.

“We are at a historic inflection point where the demand for AI compute is fundamentally reshaping the global economic landscape,” Tan said in this week’s announcement, hinting at the context behind his apparent reversal. He went on to call it a “once-in-a-lifetime opportunity.”

Even so, one institutional investor who owns Broadcom bonds raised their eyebrows this week when asked about the deal, noting that the “big question” they had was how the company planned to account for these types of guarantees on its balance sheet. Though not traditional debt, the obligations still count as liabilities that must be reported on the balance sheet.

The transaction will have a “modestly negative impact” on Broadcom’s credit due to the “debt-like obligation” of the backstop, S&P Global Ratings wrote in a note.

To be sure, Broadcom’s AI chip business has boomed in recent quarters, lifting its profits. The company reported in early June that its revenue for the second fiscal quarter grew 48% as AI chip revenue jumped 143%. Free cash flow rose 60%.

Broadcom didn’t respond to requests for comment.

A Larger Plan

More deals are likely. Broadcom described this one as the first transaction in a larger plan to work with Apollo and Blackstone to finance more than 20 GW of compute. That suggests its ambitions, if fulfilled, could see it providing future guarantees on deals worth a combined $700 billion in chip purchases, although the company’s backstop is very limited.

With so much to come, Broadcom’s initial transaction may provide a model for future structures. This account is based on conversations with four people with knowledge of the transaction, who asked for anonymity to discuss details beyond what the press releases included.

At its most basic level, the people said, the transaction involves a special purpose vehicle that will own the chips—tensor processing units Broadcom co-designed with Google–and lease them to Anthropic. To get the money to buy the chips, the SPV sold $35 billion in bonds to a collection of lenders led by Apollo and Blackstone.

Both investment firms kept some of the bonds for their own funds—or in Apollo’s case its captive insurance arm—and then sold the rest to outside investors, two of the people said. Apollo bought more than half, while Blackstone accounted for the rest, one of them said.

All of the notes—sold in three tranches of varying sizes—are secured by the chips. If Anthropic can’t pay the lease, the lenders have the right to sell the chips to recoup their money.

However, there’s still uncertainty around how quickly AI chips will decline in value over their usable lifetimes due to factors like new chips making old ones obsolete, or demand for AI declining in the future. If the residual value of the chips at the end of the lease falls below a certain level, Broadcom has agreed to compensate lenders holding the two safer tranches.

Broadcom’s backstop ensured that those two pieces secured an investment grade rating and yield around 5.75%, one of the people said.

The third tranche does not benefit from Broadcom’s backstop. That means if Anthropic defaults on the lease and the sale of chips doesn’t fully repay the debt, the investors who own those notes would be exposed to Anthropic’s credit risk. Those notes are rated below investment grade and yield 8.5%, one of the people said.

Dual Contingency

The structure means Broadcom is protected by a dual contingency. For its backstop to kick in, Anthropic has to default on the lease and the chips have to be worth less than what investors were guaranteed.

The notes are fully amortizing over the five-year term, meaning Broadcom’s risk declines to zero over the term, one of the people said.

“The strategic rationale for Broadcom has to do with supporting the end demand from customers like Anthropic for its chips—using its scale and dry powder, from a credit perspective, to put itself in a prime proposition such that Anthropic is using its products,” one of the people said. “That concept is not new or uncommon; many manufacturers across many industries have captive finance companies that help their customers purchase and finance their goods.”

This is one of the first times bond investors have been able to make a bet on Anthropic, which isn’t profitable and hasn’t issued corporate debt, one of the people said.

Banks, insurance companies, credit investors and others bought into the safer portions of the deal, assigned A1 and A2 monikers, while opportunistic credit investors bought the riskier B notes, one of the people said.

On the A1 tranche, Wells Fargo served as the global coordinator, while BNP Paribas, Citi and UBS served as joint book runners and lead arrangers, according to an Apollo press release. Goldman Sachs, Bank of America and Morgan Stanley served as joint placement agents on the A2 tranche.

In this structure, Atlas SP Partners, a unit majority owned by Apollo, formed the SPV and consolidated it on its balance sheet.

For Anthropic, the arrangement represents the clearest sign yet that the company is forging ahead with plans to create its own supply of compute, rather than renting facilities and chips from other cloud providers like Google or Amazon.

Chip financing deals like this are contingent on the company having space in data centers where it can install the chips once it has purchased them. To that end, Anthropic has lined up Google to provide a backstop on the AI lab’s leases for five data center facilities, The Information reported.

“Whether it is a compute contract or a chip lease,” one of the people said, “the lease start date is dependent on the data center being ready.”