Big Tech Debt Flood Is Taking Over Risk In Market: Credit Weekly

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When Amazon sold $25 billion of bonds earlier this month, it got a cooler reception from investors. And when SpaceX, Elon Musk’s rocket, satellite and AI conglomerate, issued bonds in June, they weakened so quickly in the secondary market that traders said they couldn’t recall a recent deal that widened so sharply.

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“As more AI-related debt is issued at spreads wide of the broad index, there is potential for this supply pressure to drag index spreads wider,” said Daniel Belton, a fixed income portfolio manager at Aegon Asset Management.

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Barclays predicts that the companies known as hyperscalers will issue around $285 billion of investment grade debt globally this year. Some investors welcome the tech-led issuance wave because the more highly-rated hyperscalers lift the market’s overall credit quality. 

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Long Bonds

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But as tech firms sell longer-dated bonds to lock-in capital while investor demand remains relatively robust, they’re commanding a greater share of the duration times spread, and thus having a greater impact on index risk than their debt footprint suggests. The biggest banks, on the other hand, tend to sell debt that matures within about 10 years. 

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“Whenever you have an industry gaining in share as a proportion of your universe, you have more concentration, and concentration is usually a negative,” said Mariya Entina, a portfolio manager at DoubleLine, who sees DTS as a key measure of risk when constructing a portfolio. “The next few years they’re set to issue more than they even issued this year, so I really don’t see that turning around for us anytime soon.”

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Tech giants have issued more long-dated bonds relative to other high-grade companies. Over the past 12 months, about 43% of hyperscaler debt supply consisted of bonds with maturities exceeding 10 years, Bank of America analysts said in a note on Monday. By comparison, longer bonds made up 24% share of M&A debt deals and 23% of all other non-financial issuance.

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Some of the long-dated hyperscaler debt is already trading at spreads close to BB rated junk bonds, despite the fact that most hyperscalers command some of the highest ratings in the investment-grade category.

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Still, the recent spread widening and cooling investor appetite are “rational responses” to the unprecedented wave of supply, said Shaun Caulfield, a research analyst at Lazard Asset Management.

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“We’re going in with eyes open,” Caulfield said. “Workflows across our team today look completely different to what they did six months ago as a result of AI, and we know these tools demand enormous investment.”

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Magnificent Seven

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According to Barclays, the Big Tech debt mirrors the “Magnificent Seven” stock concentration starting around the 2010s era. However, while that was driven by rising stock valuations, today’s fixed-income concentration stems from heavy borrowing to fund AI infrastructure, the bank said in its report.

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“On the current issuance trajectory, spillover to the broader index looks inevitable,” the Barclays strategists wrote, noting that as the market allocates more capital to tech, capacity for other issuers will shrink.

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“That should eventually lift clearing concessions and secondary spreads beyond the hyperscaler complex,” they wrote. “At that point, concentrated supply pressure becomes an index-level problem.”

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This comes as macro factors like Middle East geopolitics are already weighing on risk markets, forcing investors to simultaneously “layer in the sensitivities around what’s going on with investments in AI,” said Stephen Hooker, a portfolio manager at Newfleet Asset Management.