Broadcom sets up to $43 billion backstop for AI rack leases

Broadcom Inc. (AVGO) said in a regulatory filing that on Oct. 26 it arranged for financial partners to take on part of certain agreements to buy AI racks built on custom AI accelerators the company designed.

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The racks are tied to related lease agreements with one of the company's customers, which the filing does not name. The leases enable the deployment of compute capacity.

In connection with the arrangement, the company is providing residual value support to a newly formed special purpose vehicle, which the filing calls the Backstop.

The company describes the Backstop as a contingent liability it believes has a low probability of occurring. It cites the expectation of a strong profitability trajectory for the customer and the sustaining value of the underlying assets.

The total amount of the Backstop grows as the racks are delivered and deployed and shrinks as the customer makes payments on its lease obligations, the filing said.

The company's maximum potential liability under the Backstop, on an undiscounted basis, is approximately $43 billion once the racks are deployed.

If the customer defaults, the filing lists remedies that would limit the company's exposure. They include assuming the lease, reselling the racks to the seller at a fixed price under certain conditions, or arranging a sale of the racks.

The company's potential liability would equal any difference between 72.5% of the outstanding amounts owed on the lease and the value of the racks received upon a sale at that time.

The filing does not give a delivery schedule or name the financial partners.