(Bloomberg) — The rush to finance AI is rattling investors in the more than $10 trillion US corporate market, sparking a repricing of risks around some of the biggest technology companies that’s showing up in spiking prices for credit insurance, heightened volatility and weakening preformance.
Heavyweights including Oracle Corp., Broadcom Inc. and SpaceX are among the borrowers that priced nearly half a trillion dollars of new debt this year to pay for the infrastructure powering artificial intelligence, according to data compiled by Bloomberg. The tally is widely expected to rise by orders of magnitude in the months and years ahead. Broadcom alone may raise about $600 billion to finance computing power in the coming years, according to Bloomberg calculations.
The pace and sheer scale of the borrowings, combined with unknowns around the technology and rising interest rates, is put growing pressure on the sector. Tech has been among the worst-performing sectors across credit in recent months, leaving investors nursing losses, while average daily trading volumes for tech names in the bond and credit derivatives markets have soared.
In recent days, news of a wave of potential fresh financings from SpaceX and Broadcom, possibly topping $100 billion, sent credit derivatives linked to hyperscalers and chipmakers climbing to prices that suggest traders see a growing risk of a default over the next five years. For Oracle, it’s now above 20%, for SpaceX it’s about 16% — and even Nvidia Corp., the world’s most valuable company, is given a more than 7% risk of default in that time.
“Every new financing announcement feels like another entrant in an auction for investor balance sheet, and that’s creating a level of spread volatility that would have seemed hard to imagine a year ago,” said Mark Clegg, senior fixed-income trader at Allspring Global Investments. “Some days it feels like the market is holding an emergency meeting every few hours to reprice the size of the AI buildout.”
So-called mega transactions in the tens of billions of dollars used to be few and far between and syndicate banks would spend months telegraphing the deals ahead of launch, plus most of the huge deals were earmarked for mergers and acquisitions. This year, there have been nine US high-grade deals that are $25 billion or above in size, the most ever, most of them in tech.
The US high-yield market, meanwhile, is poised for one of its busiest year on record. And while debt markets have absorbed the record supply relatively well, investors are starting to demand higher compensation to lend to the sector, particularly as financing needs expand beyond the so-called hyperscalers into chip financing, data centers, and other structures, according to Steven Kohlenstein, fixed-income portfolio manager at T. Rowe Price.
“One concern is the growing concentration of exposure to a relatively small group of companies and ultimately the same underlying AI investment cycle, even as that risk gets distributed across different issuers, sectors, and financing structures,” said Kohlenstein. “That creates the potential for correlated risks that may not be fully reflected in current valuations.”
For now the issue is less about actual deterioration in credit quality than about market saturation. Most of these big borrowers are profitable, with steady cash flow and earnings momentum. And their weaker performance hasn’t spilled over into the broader market, which has held up relatively well.
These borrowers are also tapping as many corners of demand as they can, borrowing in global markets and exploring various debt structures to help mitigate risks. But even so, the crush of debt in such a relatively short span of time gives investors at least some bargaining power to demand more compensation for taking on the debt. And there are unknowns about the AI rollout, the potential payoff and the risks around the technology, all of which could upend valuations.
Among expected borrowings that have recently come to light, Broadcom is sketching out plans for its next blockbuster deal just days after it launched a $60 billion debt financing to help fund Anthropic PBC’s artificial intelligence buildout, Bloomberg reported Wednesday. Broadcom’s five-year CDS widened by 3 basis points to a record 136 basis points on Thursday, according to ICE Data Services.
Oracle, widely considered a key barometer for gauging AI-credit risk, is in talks with Apollo and Goldman Sachs Group Inc. to arrange money for a big purchase of chips, the Wall Street Journal reported Wednesday. That could potentially involve a structure where outside investors fund a separate special purpose vehicle that purchases chips and leases them to Oracle instead of Oracle funding a large chip purchase upfront with unsecured debt, according to some market participants.
The structure would likely reduce Oracle’s other near term borrowing needs and ease pressure on its credit rating. Still, the uncertainty is unnerving investors. The cost of guaranteeing Oracle debt against default about 10.5 basis points Thursday to a record close of 261 basis points.
Meanwhile, a measure of SpaceX’s credit risk is trading at a record for a second straight day after reports the company is in talks with banks and investors to raise $40 billion to buy chips from Nvidia Corp.
In many ways, the repricings reflect a market that is at a crossroads. Companies have immense and growing funding needs to pay for the computing capacity required to keep scaling up the technology. But revenue growth is at risk of becoming less extraordinary as competition and potentially regulation grow, according to Andrew Dassori, chief investment officer at Wavelength Capital Management. The potential market swings that result can create opportunities for traders, he said.
“Markets are adapting to these conditions and you see this in how spreads move and through the lens of volatility,” said Dassori.
–With assistance from Davide Barbuscia, Brian Smith and James Crombie.
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