Tech Equity Sales Renew AI Debt-Binge Worries

(Bloomberg) — Tech companies are selling stock like it’s the dot-com boom, and some investors fear that’s a bad sign for bondholders.

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This month alone, there’s been an $85 billion share sale from Alphabet Inc. and a $75 billion record-setting initial public offering by SpaceX. More are coming, with OpenAI considering an IPO as soon as next year, after rival Anthropic PBC, and Meta Platforms Inc. mulling raising equity.

Selling more shares might seem like a positive for bondholders who have been gorging on tech debt all year. After all, that equity bolsters balance sheets, boosting the cushion for creditors if things go awry. However, the rush to raise it, by firms that are often already generating strong cash flow, is also a sign they’re gearing up for heavier spending and probably more borrowing than investors had expected.

“It’s telling us that the amount of capital expenditure that they’re going to do is probably going to go up,” said Tom Murphy, head of investment grade credit at Columbia Threadneedle.

Traders were caught off guard this week by how quickly SpaceX’s blockbuster bonds weakened after they began trading Wednesday. Paper losses for the $25 billion offering rose to about $360 million as of Friday afternoon relative to Treasuries. The company secured an investment-grade rating despite expectations for years of negative cash flow.

Alphabet’s bonds also softened relative to Treasuries after the firm announced its equity sale, a reaction some market participants attributed to worries about the Google parent’s spending needs. Risk premiums on US high-grade tech bonds have climbed overall this month, to 0.79 percentage point as of Thursday, compared with 0.74 percentage point at the end of May.

AI Demands

Some strategists are already lifting forecasts for tech companies’ capital expenditure. JPMorgan Chase & Co. now expects $5.5 trillion of spending tied to AI and data centers through 2030, an increase of about $400 billion from its estimate in November.

That will translate into more debt issuance, according to JPMorgan. The bank is forecasting $2.1 trillion of data center financing to be raised in high-grade bond markets over the next five years, up from November’s prediction of $1.5 trillion.

That’s what some investors are fretting about. SpaceX said this week that it had $100.8 billion of cash on its books. S&P Global Ratings expects the business to burn through about $113 billion by the end of next year, and roughly $90 billion in 2028. The company will probably have to sell more debt and equity as a result, the ratings firm said this month.

Tech companies are generally jockeying to build more data centers and buy more chips to generate as much revenue from AI as possible. The big question, of course, is who will spend those vast sums of money only to see their products sputter. The history of the industry is littered with firms that looked promising, only to fade away — such as Digital Equipment Corp. or Lycos.

The potential downside of funding a loser is particularly acute in the debt markets. Bond investors rarely earn the spectacular returns that shareholders can reap in the best scenarios, but they can lose hefty amounts of principal in the worst case.

Bondholders are being asked to take obsolescence risk for decades: SpaceX’s debt sale this week included 20- and 30-year bonds, as did Nvidia Corp.’s this month. Alphabet sold 100-year bonds in sterling in February as part of a larger offering.

Buying these obligations requires faith in, among other things, a company’s ability to spend prudently to profit from AI, and management’s willingness to either curb investment when cash is constrained, or to raise additional equity.

“Bondholders are inclined to cheer equity-raise announcements as a signal for slower balance-sheet deterioration,” said Anthony Woodside, head of multi-sector fixed income and investment strategy at L&G — Asset Management, America. “However, it really means there’s a lot more debt coming too — equity is not replacing debt, it’s supplementing it.”

For now, many investors aren’t too worried. Arvind Narayanan, co-head of investment-grade credit and senior portfolio manager at Vanguard Group Inc., sees equity sales in the tech sector as a “very positive signal” for bond investors. The companies are bringing in cash, and stock sales suggest they see enough promise in their AI plans to ask shareholders to accept dilution.

But there have been signs of fatigue. Money managers are becoming more selective and demanding higher returns on AI debt, while issuers are increasingly tapping overseas markets to avoid overwhelming US buyers.

“They could force a lot of debt into the market, but they would have to pay higher and higher spreads,” said Jeff Schrom, lead credit sector and senior portfolio manager at Robert W. Baird & Co., talking broadly about hyperscalers.

Click for a podcast with Amundi on how AI debt issuance may divert demand from government bonds.

Week In Review

US investment-grade bond sales set another record in June, fueled by voracious investor demand and a wave of borrowing tied to the AI spending boom. Nvidia and SpaceX each sold $25 billion of high-grade bonds this month, helping drive volume well above dealers’ June forecasts of about $130 billion.
- However, SpaceX’s blockbuster bond sale is weakening so quickly in the secondary market that traders say they can’t recall another recent deal that widened this sharply.
- Credit-default swaps tied to SpaceX have begun actively trading, allowing investors to hedge against potential losses or to speculate on the creditworthiness of the firm.
- Read more: SpaceX’s Quickfire Investment-Grade Rating Brings Out Skeptics
ByteDance, the developer of TikTok, is in preliminary talks with banks to borrow about $20 billion, in what would be the firm’s largest offshore loan yet at a time when it’s boosting AI investments.
Sony Group was still marketing the original PlayStation when it last tapped the US investment-grade bond market. Almost three decades later, it’s made a comeback, raising $1 billion from a bond offering.
A T. Rowe Price Group private credit fund raised $400 million through an inaugural sale of high-grade bonds, testing investor appetite for a sector under pressure.
- Ares curbed withdrawals from one of its private credit funds after redemption requests rose to 14.4%, nearly half of which came from investors outside the US, while requests from US-based investors fell from the previous quarter.
A pair of junk-bond deals funding leveraged buyouts hit the market after loan offerings launched for both last week, namely a $1 billion sale of dollar and euro notes backing Stonepeak’s majority stake purchase in BP’s Castrol division, and a $1 billion note to partly finance the acquisition of Global Business Travel Group.
Hertz is taking an unusual approach to issuing debt: concurrently serving up shares that are designed to be shorted.
BNP Paribas and UBS are expected to lead a large group of banks in financing Bain Capital’s acquisition of Volkswagen’s heavy diesel-engine unit.
A £300 million ($396 million) portfolio of mortgages linked to collapsed lender Market Financial Solutions looks to never have been registered with public property records, according to court filings, threatening to complicate lenders’ efforts to establish their claims over the underlying assets.
Thoma Bravo-backed Qlik Technologies retired about $111 million of an existing second-lien loan by taking advantage of falling prices and buying it back at a discount to reduce its debt load and lower interest expenses.
Joh. Berenberg, Gossler & Co. and Brookfield Asset Management are battling over the future of GoldenPeaks, an energy company staring at collapse after borrowing $1.5 billion for European solar-power projects.
Family Dollar Stores is sounding out investors for more than $1 billion of debt as the US discount retailer seeks to fund a dividend payout and refinance existing borrowings amid a business overhaul that has shut hundreds of stores.

On the Move

Investment banker Derek Bomar has left Deutsche Bank to set up Falkon Partners, an investment management firm based in New York. Bomar, who joined Deutsche to cover asset managers in 2024 after a nine-year-stint at Goldman Sachs, is co-founding the firm with Alex Beygelman, who was most recently Deutsche’s head of private credit investment banking.
HSBC hired Mark Byrne for its debt capital markets team to help manage sovereign, supranational and agency bond sales. Byrne was previously London-based head of European Credit Syndicate at TD Securities.
Ares partner Pradeep Mohinani, who focuses on Asia credit and is based in Hong Kong, is retiring at the end of July. He was a partner at the firm for over five years following Ares’ 2020 acquisition of SSG Capital Management, where he had been managing director.
Citi hired Anthony Yap from HSBC as head of leveraged finance in Australia and New Zealand as the US bank strengthens its debt capital market business in the Asia-Pacific region. In addition, Maria Chua joins Citi in July from UBS as a director for leveraged and syndicated loans in Southeast Asia, based in Hong Kong.
SMBC’s asset management arm hired Heng Cheam as head of capital formation, as the financier continues to grow its private markets presence across Asia Pacific. Cheam was formerly with the Asia Pacific private credit team of DWS Group, the asset management arm of Deutsche Bank, which was disbanded last year.

–With assistance from Ying Luthra, Liana Baker and Nabila Ahmed.