Morgan Stanley expects borrowing by the massive tech companies known as hyperscalers to reach $400 billion this year, up from $165 billion in 2025. Alphabet said its capital expenditures will reach as much as $185 billion this year to finance its AI build-out.

That kind of exuberance is what has some investors worried. London hedge fund Altana Wealth last year bought protection against Oracle defaulting on its debt. The cost was about 50 basis points a year for five years, or $5000 a year to protect $1 million of exposure. The cost has since risen to around 160 basis points.

Bank Users

Banks that underwrite hyperscaler debt have been significant buyers of single-name CDS lately. Deals to develop data centers or other projects are so big and happening so fast underwriters are often looking to hedge their own balance sheets until they can distribute all of the loans tied to them.

“Expected distribution periods of three months could grow to nine to 12 months,” said Matt McQueen, head of credit, securitized products and muni banking at Bank of America Corp., referring to loans on projects. “As a result, you’re likely to see banks hedge some of that distribution risk in the CDS market.”

Wall Street dealers are rushing to meet the demand for protection.

“Appetite for newer basket hedges can be expected to grow,” said Paul Mutter, formerly the head of US fixed income and global head of fixed income sales at Toronto-Dominion Bank. “More active trading of private credit will create additional demand for targeted hedges.”

Some hedge funds see banks’ and investors’ demand for protection as an opportunity to profit. Andrew Weinberg, a portfolio manager at Saba Capital Management, described many CDS buyers as “captive flow” clients — bank lending desks or credit valuation adjustments teams for example.

Leverage remains low at most of the big tech companies, while bond spreads are only slightly tighter than the corporate index average, which is why so many hedge funds, including his, are willing to sell protection, according to Weinberg.

“If there’s a tail risk scenario, where will these credits go? In a lot of scenarios, the big companies with strong balance sheets and trillion dollar market caps will outperform the general credit backdrop,” he said.

But for some traders, the frenzy of bond selling has all the hallmarks of complacency and mispriced risk.

“The sheer amount of potential debt suggests that these companies’ credit risk profiles could come under some pressure,” said Rory Sandilands, a portfolio manager at Aegon Ltd., who says he has more CDS trades on his book than a year ago.

Click for a podcast on the state of the MBS trade with Clark Capital Management

Week In Review

• Alphabet Inc. raised almost $32 billion in debt in less than 24 hours, showing the enormous funding needs of tech giants competing to build out their AI capabilities — and the huge appetite from credit markets to fund them. The Google parent sold sterling and Swiss franc-denominated offerings, both the biggest-ever corporate bond sales in their respective markets. The sterling issue included an ultra-rare 100-year note.

• Elon Musk’s bankers are working on a potential financing plan after the merger of SpaceX and xAI that could trim some of the heavy interest costs that the billionaire racked up in recent years.

• The private equity investors set to take over Electronic Arts Inc. are engineering a debt buyback that has hammered the company’s bonds. Now noteholders are banding together to figure out what – if anything — they can do to fight back.

• Citadel accused former portfolio manager Daniel Shatz, now Marshall Wace’s global credit head, of “shamelessly violating” employment agreements and stealing confidential information to build a team for a rival.

• Wall Street dealers are demanding higher compensation to trade corporate bonds issued by private credit funds, as investors turn squeamish about the funds’ exposure to software firms facing AI disruption.

  • Concentrix Corp. paid a hefty price this week to refinance debt amid fears that AI will undermine its business.

  • The software and technology sectors pose one of the all-time great concentration risks to the speculative-grade credit market, according to Deutsche Bank AG. UBS says credit markets haven’t fully priced in AI disruption risk, and any trouble in corporate debt could make it harder for firms to raise money.

• Ares Management Corp. is providing $2.4 billion of debt financing to Vantage Data Centers, part of which may be used for the build out of infrastructure supporting Oracle Corp.’s partnership with OpenAI.

  • A data center project expected to be leased by Nvidia Corp. sold $3.8 billion of junk bonds after receiving about $14 billion of orders from investors.

  • A data-center landlord leasing to the operators of the artificial intelligence matrix secured the highest credit grade from one of the top three ratings firms for the first time.

• Lenders to bankrupt restaurant operator FAT Brands Inc. agreed to drop their demand that Andrew Wiederhorn be suspended without pay after he directed the company to sell stock in FAT Brands’ Twin Peaks dining chain.

On the Move

• Ken Griffin’s Citadel Securities recruited Morgan Stanley’s Richard Smerin as global head of structured products, the latest in a string of key Asia-based recruits.

• DWS Group tapped Deutsche Bank AG veteran Oliver Resovac to oversee the asset manager’s private markets products as well as European credit deals.

• Wells Fargo Investment Institute named Luis Alvarado co-head of global fixed-income strategy.

• Bain Capital hired Brookfield Asset Management managing director Michael Horowitz as a partner in its special situations business.

–With assistance from Sam Potter, James Crombie and Dan Wilchins.

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