AI infrastructure as a "money pit": Intensive financing by tech giants sparks debt market concerns, widening high-grade credit spreads

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Tech giants are raising funds and expanding at the most rapid pace since the dot-com bubble, but bond investors are not equally optimistic. This month, the risk premium for high-grade US tech bonds rose to 0.79 percentage points, notably higher than 0.74 percentage points at the end of May.

Since June, Alphabet has completed an $85 billion equity sale, and SpaceX set an IPO record at $75 billion; OpenAI is considering an IPO as early as next year, following competitor Anthropic, while Meta is also planning equity financing.

Ordinarily, equity financing thickens the balance sheet and offers bondholders a larger safety cushion. However, these companies already have strong operating cash flows and are eager to raise funds on a large scale. To many bond investors, this means that AI capital expenditures will far exceed previous expectations—accordingly, debt will also increase.

"This tells us that their capital expenditure scale may continue to rise," said Tom Murphy, Head of Investment Grade Credit at Columbia Threadneedle.

SpaceX Bonds Sell Off Upon Listing, Alphabet Bond Prices Weaken

Concerns have already shown up in prices.

SpaceX completed a $25 billion bond issue this week, but traders were caught off guard by the speed of the price drop—by Friday afternoon, the book loss of these bonds relative to US Treasuries had expanded to about $360 million.

Alphabet's bonds also softened after news of the equity sale, with some market participants attributing this to investor worries over the AI spending needs of Google’s parent company.

J.P. Morgan Raises Forecast: $5.5 Trillion AI Spending, $2.1 Trillion Bond Financing

Wall Street investment banks are raising their AI capital expenditure forecasts.

J.P. Morgan’s latest forecast is that by 2030, total expenditure related to AI and data centers will reach $5.5 trillion, about $400 billion higher than its estimate last November. Accordingly, investment-grade bond financing for data centers over the next five years is expected to reach $2.1 trillion, up from a previous forecast of $1.5 trillion—a 40% increase.

Take SpaceX as an example. The company has $100.8 billion in cash on its books, but S&P Global Ratings estimates it will burn about $113 billion by the end of next year and another $90 billion by 2028, making further debt and equity financing highly likely.

"Equity Is Not a Substitute for Debt, But a Supplement"

"Bondholders tend to cheer announcements of equity fundraising, seeing them as a sign that balance sheet deterioration is slowing," said Anthony Woodside, Head of Multi-Sector Fixed Income at L&G Asset Management America. "But actually, this means more debt will follow—equity is not replacing debt, but supplementing it."

Not everyone is so pessimistic. Arvind Narayanan, Co-Head of Investment Grade Credit at Vanguard, thinks equity sales by tech companies are "a very positive signal" for bond investors—management’s willingness to let shareholders suffer dilution shows confidence in their AI plans.

But buyers are becoming more selective. Asset management firms are demanding higher yields on AI bonds as compensation, and issuers are beginning to turn to overseas markets so as not to overwhelm US buyers.

"They can flood the market with a lot of debt, but the price is ever higher spreads," said Jeff Schrom, Credit Strategist at Robert W. Baird, referring to hyperscale tech firms.

Deeper unease centers around maturities. SpaceX issued 20-year and 30-year bonds, Nvidia issued $25 billion in bonds across multiple maturities, and Alphabet issued a 100-year pound-denominated bond in February this year.

Buying these bonds means taking on decades-long technology obsolescence risk, and the tech industry is never short of once-promising players that eventually become obsolete.

In the best-case scenario, bond investors rarely get the kind of stunning returns shareholders enjoy, but in the worst-case scenario, bondholders’ losses can be equally heavy.

Risk Warning and DisclaimerThe market entails risks, invest with caution. This article does not constitute personal investment advice and does not take into account the individual investment objectives, financial situation, or needs of any particular user. Users should consider whether any opinions, views, or conclusions in this article fit their individual situation. Investments based on this are at your own risk. ```