High AI Spending Increases Borrowing

Bank of America analyst Yuri Seliger stated in a note sent to investors this week that the increase in borrowing to finance artificial intelligence data center projects in recent weeks indicates that more AI supply is coming.

The analyst noted that borrowing to finance AI infrastructure "exploded in September and has continued so far in October."

According to BofA, the investment-grade bond market supply, which includes Meta ($30 billion), Oracle ($18 billion), and RPLDCI ($27 billion), reached a total of $75 billion; this figure excludes the $38 billion loan related to the Oracle / Vantage data centers currently being prepared by banks.

Seliger stated that this represents a "dramatic jump" from the pre-COVID annual average supply of $37 billion.

Seliger explained the likelihood of more AI-related borrowing supply by saying, "The answer is probably yes."

The analyst emphasized that the absence of AI financing in the investment-grade bond market before September was related to the strong cash flow generation of major tech firms (Amazon, Google, Meta, Microsoft, Oracle).

However, BofA indicated that Meta's recent decision to increase spending suggests that “companies collectively may be approaching a limit on how much AI capital expenditure they are willing to make solely from cash flows.”

The bank's consensus forecasts indicate that “when expenditures for dividends and buybacks are excluded in 2025 and 2026, AI capital expenditures will reach 94% of operational cash flow”; this rate was projected to be 76% in 2024.

However, a rate below 100% indicates that companies technically do not have to issue debt to finance their expenditures; however, BofA expressed that this rate is “approaching a close level.” The analyst added that eliminating stock buybacks could "pull the ratio below the 70s," emphasizing that “given the high stock multiples, equity could be an attractive alternative.”