Bond Market Flashing Warning Lights Over AI Investment... Big Tech Credit Risk Hits Record High

[Financial News] Credit risk is rising rapidly at major U.S. big tech companies at the center of the Artificial Intelligence (AI) investment boom. As astronomical spending on data centers, semiconductors, and AI model development weakens cash flow, the bond market is warning that "the pace of AI investment has outstripped the ability to generate cash."
According to the Financial Times on the 27th local time, Credit Default Swap (CDS) premiums, a key gauge of corporate default risk, have recently surged to record highs across AI investment leaders including Oracle Corporation, NVIDIA, Alphabet Inc., Meta Platforms, Amazon, Broadcom Inc., and SpaceX.
The biggest concern is Oracle Corporation. Its five-year CDS has climbed to 215 basis points, up about 50% from 144 basis points at the start of the year. That means investors would need to pay $215,000 a year to insure $10 million in bonds against default risk.
Oracle Corporation recently announced plans to invest $70 billion in building data centers over the next year. S&P Global then downgraded its credit rating by one notch to BBB- credit rating, the lowest level within investment grade, citing uncertainty over profitability from massive AI spending.
John Aylward, CIO at Son Asset Management, said, "Credit markets hate uncertainty the most," adding, "A trust crisis is emerging as it becomes difficult to predict the pace of AI investment and the scale of funding."
Meta Platforms also saw the interest rate on $12 billion in debt raised to build a data center in Texas approach the level of speculative-grade corporate bonds.
NVIDIA's CDS also rose to a record high of 79 basis points. The Financial Times reported that "NVIDIA is considering up to $250 billion in payment guarantees to help finance OpenAI's 10GW data center project in Ohio."
Alphabet Inc. also saw its CDS rise to a record high after free cash flow to the firm (FCF) turned negative for the first time since its listing in the second quarter.
Markets are more concerned about how long it will take to recoup investments than about the expansion of AI spending itself. David Brown, co-chief investment officer at Neuberger Berman, said, "The biggest question is how long capital spending at the current level will continue and when cash flow will turn positive again." He added, "Because it is difficult to get answers for now, the bond market is showing weakness."
Manish Kabra of Societe Generale said, "Hyperscalers now need to watch CDS rather than earnings per share (EPS)," adding, "As the pace of AI investment continues to outstrip the pace of cash generation, free cash flow is falling to cyclical trough levels."

[email protected] Kim Kyung-min Reporter