Big Tech credit risk gauges climb as AI investment costs surge

Traders Union
All News
Business & Wealth
Big Tech credit risk climbs

Highlights

Credit default swap prices for Oracle, SpaceX, Alphabet, Amazon, Meta, Broadcom, and Nvidia have surged to record highs amid escalating AI investment costs and debt issuance.
Meta's cost to finance its $12 billion Texas data centre has jumped to levels typical for B-minus rated bonds, despite its investment-grade status.
Oracle's five-year CDS rose from 144 to 215 basis points after announcing a $70 billion data centre expansion, prompting an S&P credit rating cut to BBB-minus.

Credit hedging costs rise across AI leaders

As reported by Financial Times, prices for credit default swaps linked to Oracle, SpaceX, Alphabet, Amazon, Meta, Broadcom and Nvidia have risen to record highs in recent days, according to LSEG data. The moves signal growing market anxiety over the debt burden tied to the AI build-out.

Credit default swaps, widely used to hedge or bet against corporate debt, are climbing as investors react to heavy issuance from so-called hyperscalers. John Aylward, chief investment officer of Sona Asset Management, says credit markets are struggling with the uncertainty surrounding the pace and cost of AI financing, triggering a wider loss of confidence.

Meta's latest borrowing cost for its $12 billion Texas data centre has also risen markedly, reaching levels closer to junk-rated bonds. Aylward says the debt priced in line with where B-minus deals are currently trading, an unusual outcome for a company of Meta's standing.

Oracle and Nvidia highlight broader market pressure

Oracle is seeing some of the sharpest stress, with its five-year CDS quoted at 215 basis points on Monday, up from 144 basis points at the start of the year. Last month, the company said it would invest $70 billion in the coming year to expand its data centre footprint, prompting S&P Global Ratings to cut its credit rating to BBB-minus, one notch above junk, citing an uncertain path to profitability.

David Brown, global co-head of investment grade at Neuberger Berman, says investors are questioning how long this scale of capital spending can continue and when positive cash flow may return. He says the answer is unlikely to come soon, helping explain weaker performance in the sector.

The concern is also spreading to Nvidia, where the cost of protecting five-year debt has reached a record 79 basis points. The chipmaker is in talks to provide a $250 billion guarantee to support OpenAI's financing for a large data centre project, according to a person familiar with the matter, while Alphabet's CDS has also climbed to a new high after its free cash flow turns negative in the second quarter for the first time since its listing.

Investors still view the probability of default among investment-grade issuers as low, but market participants say CDS is increasingly being used to guard against future downgrades and volatility. George Catrambone of DWS Group says hedging is becoming more appropriate after recent capital spending disclosures, while Société Générale's Manish Kabra says credit swaps, rather than earnings per share, are becoming the more telling indicator for hyperscaler stress.

In our earlier coverage of Fitch’s downgrade of Buffalo, New York, we outlined how consecutive operating deficits and shrinking reserves tightened the city’s credit profile and triggered a Negative Outlook. The piece also highlighted the longer-term drag from sizeable unfunded OPEB liabilities and the risk that spending continues to outpace recurring revenue even after tax increases and additional state aid.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.