Investors are increasingly concerned over rush of borrowing to fund huge investments in data centres
A closely watched gauge of risk in holding the debt of companies at the centre of the AI boom is rising rapidly, underscoring growing jitters over Big Tech’s vast spending on data centres, chips and computer memory. Prices for credit default swaps, popular tools to bet against corporate debt, tied to Oracle, SpaceX, Alphabet, Amazon, Meta, Broadcom and Nvidia have risen to record highs in recent days, according to LSEG data. The sharp moves echo a sell-off in debt issued by so-called hyperscalers, which are piling hundreds of billions of dollars into developing vast data centres and sophisticated AI models. It comes as investors have grown increasingly worried about the deluge of debt sold by these companies.
“Credit markets don’t deal well with uncertainty, and the sheer unpredictability of the pace and cost of AI financing is triggering a serious crisis of confidence right now,” said John Aylward, chief investment officer of credit manager Sona Asset Management. In a sign of waning investor interest in AI debt, Meta’s latest borrowing cost for its $12bn Texas data centre has risen significantly to levels closer to junk-rated bonds. The debt “priced in line with where B- deals are currently trading… a quite remarkable situation, but that is the world we are living in today”, Aylward said.
The moves have been most acute at Oracle, whose five-year CDS was quoted at 215 basis points on Monday, up from 144 bps at the start of the year, meaning that investors now need to pay $215,000 annually to insure $10mn of debt against default. The database group last month said it would invest $70bn in the coming year to finance its data centre build-out, prompting S&P Global Ratings to downgrade its credit rating to triple B minus, just one notch above junk status, citing an uncertain path to profitability amid massive AI investments.
“The big question is, will this level of [capital spending] grow in perpetuity and when is that inflection point where we will see positive cash flow again?” said David Brown, global co-head of investment grade at Neuberger Berman. “We won’t have the answer anytime soon, which explains the weakness in performance.” “It’s potentially going to be a problem because there’s still so much financing waiting to be done,” Brown said.
The concern is spreading beyond Oracle, with the cost of protecting Nvidia’s five-year debt also hitting a record of 79 bps. The chipmaker is in talks to provide a massive guarantee to help OpenAI finance a 10GW data centre project in Ohio, according to a person familiar with the matter.
Details of the scheme have not been finalised but Nvidia could back about $250bn for the scheme, they added. OpenAI and Nvidia declined to comment on the plan, which was first reported by The Wall Street Journal. Alphabet’s CDS — which only started trading in late November last year — was also quoted at a new high of 67 bps on Monday, after the company’s free cash flow turned negative in the second quarter for the first time since going public more than two decades ago. While investors assess the likelihood of default for investment-grade issuers as low, buying CDS had become a way for investors to protect themselves from future credit downgrades and market volatility, said George Catrambone, head of fixed income for the Americas at DWS Group.
“Hedging is becoming more and more appropriate, especially after seeing these capex numbers post-earnings,” Catrambone said. “A huge amount of debt was issued without necessarily being able to illustrate revenues yet. There’s more and more scrutiny being placed.” CDS has also become a broader market proxy for bearish bets on tech names. “For hyperscalers, watch CDS, not EPS,” said Manish Kabra, head of US equity strategy at Société Générale, referring to earnings per share, a popular metric of stock valuation. “AI capex is still outrunning cash generation, driving [tech group’s] free cash flow towards cycle lows,” Kabra said.