Investors sour on Big Tech debt amid AI arms race
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The $3.5 billion, 30-year bond issued by Oracle has dropped roughly 8% since its October peak and is now trading at just 65 cents on the dollar.
Why it matters: It's a sign of growing investor unease over Big Tech's borrowing binge to fund artificial intelligence infrastructure.
Zoom in: The credit risk for Oracle has widened faster than the overall investment-grade market has, according to Bank of America analysts.
- Five-year credit default swaps — insurance-like contracts which protect investors against a default of company debt — have widened to 80 basis points, the highest in about two years.
- Bank of America flags this as a warning that investors are uncomfortable with how Big Tech is financing its AI buildout.
Zoom out: Financial conditions for the market have loosened, helped by lower interest rates and a rally in risk assets.
- Even as credit spreads have widened recently amid some AI bubble concerns, they continue to remain near historically low levels.
- Still, the bond spreads and credit default swap spreads of tech companies are widening, making it more expensive to insure their debt.
- Bank of America says that trend reflects concerns that tech companies may not have enough cash to finance the "AI capex arms race."
The bottom line: Just two weeks ago, bond investors were clamoring for their piece of the AI pie, with the latest debt issuance by Meta four times oversubscribed.
- A drop in demand coupled with a selloff in Big Tech stocks could be an indicator that investors are questioning how much is too much to spend on an AI buildout without a clear path for returns on that investment.
