(Bloomberg) — Pacific Investment Management Co.’s leveraged finance chief urged investors to be cautious with the high-yield debt that finances data centers, where winners and losers are starting to emerge as issuance booms.
“There’s already been some nervousness when some of the deals have started coming out. If you think about it, a year ago the size of that part of the market was zero,” Pimco’s David Forgash said Thursday in a Bloomberg Television interview. “And now we’re up about 4% in the high-yield market. And by the next two years the expectation is it will be 10%.”
While 75% of that debt is trading at spreads of 6%, the rest is at spreads of 10% or greater, masking underlying stress beneath seemingly calm market conditions, he said.
Junk-debt borrowing for data centers now represents 2.7% of the US market, part of more than $250 billion in global borrowing by hyperscalers to meet the demand for infrastructure to support artificial intelligence. The par value of the US junk debt is about $40 billion, most issued within the past year, according to Bloomberg Intelligence.
For high-yield data center deals, Pimco focuses on investment-grade companies that have offtake agreements that can’t be easily terminated, with repayment assured before contract expiration and residual value remaining afterward, Forgash said on the sidelines of Goldman Sachs Group Inc.’s leveraged finance and credit conference in Dana Point, California.
“The big portion of what AI is disrupting — it is software for one, and then it’s a lot of servicing that goes in the software companies,” Forgash said.
Software companies represents 15% of leveraged loans but only 3% of high-yield bonds, limiting contagion risks in the latter market, Forgash said. Pimco has largely avoided software exposure in its actively managed loan products, which have returned more than 6% by selecting among approximately 1,200 loan issuers.
The firm sees opportunities in homebuilders and building suppliers, which have sold off despite potential benefits from eventual rate cuts, and maintains an overweight position in energy through year-end, Forgash said.
(This story was produced with the assistance of Bloomberg Automation.)
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