BIG Tech’s borrowing spree is set to keep reshaping credit markets in the months ahead, with the ripple effects likely to spread well beyond the companies funding artificial intelligence (AI) and data-centre expansion.
The flood of new debt from US technology giants could increasingly push up credit risk measures for some of the world’s highest-quality companies, even as overall corporate bond spreads remain close to historic lows, according to a recent Bloomberg report.
Citing strategists at BNP Paribas SA, the newswire points out that intensifying competition for investor cash at the top end of the credit market is creating an inadvertent rise in risk metrics for companies with little or nothing to do with the AI boom.
“All high-quality credit competes with hyperscalers for capital,” Josh Farber, head of European credit strategy at BNP Paribas, tells Bloomberg.
The pressure is already showing up in credit default swaps (CDS), a form of insurance against a borrower defaulting on its debt. BNP Paribas did not disclose the individual companies in its analysis, but Bloomberg data show CDS spreads for luxury group LVMH, drugmaker Sanofi and defence company BAE Systems Plc have risen by more than 10% since the end of last year.
The development points to a broader issue for investors: As hyperscalers compete aggressively for funding, even companies with strong balance sheets could face a higher cost of credit simply because they are competing for the same pool of capital.
Farber’s analysis, which focuses on the iTraxx Europe index of high-grade corporate CDS, suggests a “super trend” could be developing in which individual credit spreads converge towards the average level of the index.
BNP Paribas has recommended a two-pronged trade to clients, involving buying a basket of companies with tight spreads while selling protection on the index.
At first glance, the shift is not particularly obvious.
CDS index risk premiums remain near their tightest levels in almost two decades, helped partly by heavy demand for protection against weaker borrowers, which has pushed their cost of protection lower.
But beneath those headline numbers, the market is becoming increasingly crowded at the highest-quality end.
Biggest new borrowers
Companies such as Meta Platforms Inc, Alphabet Inc and Amazon.com Inc have raised hundreds of billions of dollars across US and other currencies this year to finance their AI ambitions. Within the major hyperscaler group, only Oracle Corp has a credit rating below double-A.
The sheer scale of the borrowing has made Big Tech some of the biggest new borrowers in markets, including the United Kingdom, Japan and Switzerland almost overnight.
That competition for capital could become even more significant if the expected wave of technology debt continues into the second half of the year and beyond.
Wall Street analysts broadly expect further borrowing by technology companies as they continue to fund massive investments in AI infrastructure.
For credit investors, the concern is that a growing supply of highly rated technology debt could force repricing across the wider investment-grade market.
“If you have American companies printing wider, this will potentially reprice the investment-grade market overall,” Andrea Seminara, chief executive officer at Redhedge Asset Management, tells Bloomberg in an interview.
Global investment-grade corporate bond spreads are currently around 80 basis points, according to Bloomberg indexes, leaving them only about six basis points above the post-financial crisis low reached earlier this year.
That leaves relatively little room for complacency if the flood of new debt begins to overwhelm investor demand.
Competition for capital
Credit spreads on corporate bonds and the cost of protection through CDS generally move in the same direction, although the magnitude can differ.
As competition for capital pushes borrowing costs higher even for safer companies, their CDS spreads could follow.
The hyperscalers themselves have already seen their CDS spreads widen this year, despite a retreat in recent weeks, amid heavy trading.
The situation could ultimately provide the jolt the credit market needs after years of increasingly tight spreads.
“This can be a real wake-up call for credit compared to what we’ve seen in the last few years. It’s unsustainable for the market to keep getting tighter and nothing moving much,” Seminara says.
Banks arranging new hyperscaler bond sales are already taking steps to ensure the securities perform well once they begin trading. Bloomberg reports that some are avoiding fast-money investors such as hedge funds, which can contribute to sharp swings in the secondary market.
Even so, the expected continuation of Big Tech borrowing means the pressure is unlikely to disappear soon.
For investors, the bigger question may be whether the traditionally defensive parts of the investment-grade market are still offering enough compensation for the risks they carry.
“It more broadly starts to raise the question of how should investors be looking at these tighter names,” Farber says. “It has woken up the market that you’re not really getting paid very much for the risk.”