AI arms race sparks credit derivatives boom among tech giants
Kyiv • UNN
Investors are concerned about tech companies accumulating debt to fund AI, which is fueling a resurgence in the credit derivatives market. The volume of outstanding contracts on Alphabet's debt has reached $895 million, and Meta's $687 million.
Bond market investors are increasingly concerned that the world's largest technology companies will continue to accumulate debt to finance the development of super-powerful artificial intelligence. This fear is fueling a rapid resurgence in the credit derivatives market, where banks and funds are trying to hedge against the risk that Big Tech corporations will become less able to service their multi-billion dollar obligations. This is reported by Bloomberg, writes UNN.
Details
Credit default swaps (CDS) on bonds of companies such as Alphabet and Meta were almost untraded a year ago due to the high reliability of these issuers, but now they have become some of the most active contracts in the US over-the-counter market. Data from Depository Trust & Clearing Corp. show that the volume of outstanding contracts for Alphabet's debt has already reached about $895 million, and for Meta's debt - $687 million. Investors fear that in terms of capital expenditures, "hyperscalers" are turning into the most indebted structures in the world, which forces Wall Street dealers to quote risks for amounts from $20 to $50 million for companies whose bonds were previously considered risk-free.
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Gregory Peters, co-chief investment officer at PGIM Fixed Income, notes that the scale of AI investments is so enormous that it forces the market to question the advisability of openly holding such debts without insurance. As technology development costs are projected to exceed $3 trillion, underwriting banks that finance data center construction are increasingly buying CDS to hedge their own balance sheets until credit risks are distributed among other players.
Record borrowing and alarming signals
Despite growing concerns, tech giants currently have no problems attracting funds: this week, Alphabet successfully sold $32 billion in bonds, including 100-year papers, for which demand several times exceeded supply.
However, Morgan Stanley analysts expect that the volume of hyperscaler borrowing will jump to $400 billion this year compared to $165 billion in 2025. Alphabet itself plans to allocate about $185 billion to AI development in the current year alone.