Increasing Debt Risk in Technology Companies

New York - The bond sales made by major technology firms to finance their artificial intelligence expansion represent a high-risk bet in the 9 trillion dollar U.S. corporate bond market. Leading investors like DoubleLine are taking a cautious approach due to the increasing debt burden in the sector.

In the past two months, four large cloud and artificial intelligence 'hyperscaler' companies have collectively conducted public bond sales worth approximately 90 billion dollars. Alphabet, the owner of Google, sold 25 billion dollars, Meta sold 30 billion dollars, Oracle sold 18 billion dollars, and most recently, Amazon sold 15 billion dollars in bonds.

Many analysts expect that there will be a higher amount of hyperscaler debt issued next year as major technology firms race to finance AI-focused data centers. High-quality bond markets may need to absorb 1.5 trillion dollars worth of AI data center bond sales over the next five years; such debts are expected to represent more than 20% of the investment-grade bond market by 2030, according to J.P. Morgan analysts.

Robert Cohen, global head of credit at DoubleLine, stated, "The entry of this data center capacity into the investment-grade market presents a significant refinancing opportunity in a new sector and could pose a material risk to the high-quality market."

Cohen added, "There is a large and yet unproven sector, and this could significantly change the risk profile of investment-grade credit; that is my concern."

The growing debt among technology companies adds a new layer of concern in financial markets, despite high returns from artificial intelligence. Investors are cautious as this technology has not yet provided earnings justifying such large capital expenditures.

Although U.S. investment-grade credit spreads are close to historical lows, they have widened somewhat in recent weeks; this reflects growing concerns in the market about the influx of new bond supply. Spreads widened to 86 basis points on Friday, reaching the highest level since the end of June.

The U.S. investment-grade bond market is valued at approximately 9.2 trillion dollars, according to the ICE BofA U.S. Corporate Index.

Cohen noted that the corporate bond market remains in good shape due to several factors including a strong economy, healthy corporate balance sheets, lower interest rates in recent years, and an expectation of a compatible Federal Reserve in the future.

However, Cohen emphasized that the likelihood of bond issuances coming from technology companies flooding the market is "not an immediate risk," but that he remains "on alert" regarding this situation and continues to be cautious about increasing exposure to this debt. "They are building capacity to support their objectives; however, the ultimate usage is not entirely clear," he added.