Hyperscalers are significantly ramping up their AI capex spending — and increasingly using credit markets to fund it.
But investors say this shift is challenging mega-cap tech giants’ so-called ‘fortress balance sheet’ status, and rips up what they call the “unspoken contract” that kept speculative AI spending largely separate from debt markets.
After Amazon, Meta and Google-owner Alphabet all unveiled sizable increases in their full-year capex spending plans during earnings season, UBS data indicates that aggregated capex spend among AI hyperscalers could top $770 billion in 2026 — some 23% higher than previously expected.
In a Feb. 18 note, UBS credit strategists said such increases imply a $40 billion to $50 billion ramp-up in borrowing from hyperscalers, pushing public market debt issuance to between $230 to $240 billion this year.
Oracle.
Al Cattermole, fixed income portfolio manager at Mirabaud Asset Management, said this tilt toward the bond market is dramatically shifting the dynamic between hyperscalers and investors.
“For years, we’ve been told this AI spend would be funded by generated cash flow — that it is equity risk, it is speculative, and not to worry about it from a credit point of view,” Cattermole told CNBC in an interview.
“There now seems to be a change in the unspoken contract that while we would continue to lend to these businesses, really AI capex was still going to be equity or cash funded….By bringing capex spend into the debt markets, you now have the question of credit worthiness.”
‘Break point’
Last September, Oracle tapped the bond market for some $18 billion in one of the biggest debt issuances on record. Others have rapidly followed, with Google-owner Alphabet recently issuing some $20 billion in debt, including a rare 100-year sterling-denominated bond.
That’s placing the sector’s debt load under sharper scrutiny.
“Everyone had been treating these AA- or A-rated tech companies as essentially cash-plus. Then, suddenly, to be putting this amount of debt on the balance sheet, that’s been quite the turn,” Cattermole said. “It’s only been three or four months since we’ve had this turn — everyone’s getting used to it in a new way.”
Investors now see trouble up ahead. BlackRock said mega-cap tech companies are using the current credit issuance “bonanza” to bridge the gap between current investment and future revenues.
“The problem: rising corporate borrowing adds supply to bond markets struggling to digest large public deficits,” BlackRock said in its weekly market commentary.
“What has changed is the market’s focus: it now asks how AI adoption will translate into revenues and profits. This sorting of winners and losers means it’s prime time for active investing,” BlackRock added.
The world’s largest asset manager noted that AI builders have largely tapped the U.S. investment grade market, “so we prefer high yield and European bonds.”
As Oracle’s share price has trended lower over the past six months, credit default swaps on its bonds — which offer protection in the event of a borrower being unable to repay its debt — have seen sharp bouts of volatility.
Cattermole, meanwhile, pointed to Alphabet’s planned capex of almost 50% of its revenue for next year, which he said was approaching an “unheard-of level.”
“You wouldn’t see that for a normal company at any point in time,” he added. “We are very clearly at a break point in natural cycles.”
‘Hidden risks’
Underlining concerns over a potential debt-fueled AI overspend, investors fear that the huge data centers that are key to the buildout could be rendered obsolete by rapid technical improvements that make chips more efficient and reduce demand for capacity.
That carries far-reaching implications for debtholders, according to Cattermole.
“What if, in three years, these Nvidia chips get outstripped by a Chinese competitor, and I’m lending for five or eight years, and in year three, my data center is obsolete?” he said.
Shaan Raithatha, senior economist at Vanguard, said AI hyperscalers are starting from a very strong position, boasting “strong balance sheets, strong free cash flow generation, and strong moats” — but he acknowledged that they are now taking on more leverage.
“Are there hidden risks building in the system, whether it’s special purpose vehicles, the greater leasing of assets, greater off-balance sheet activity? The hidden risks are building, we don’t know if that’s ever going to come up,” Raithatha told CNBC’s “Squawk Box Europe” on Wednesday.
“But, clearly, investors have to be mindful of that when they start to discount stock market returns into the future.”
—CNBC’s Michael Bloom contributed to this report.