Borrowing Costs Rise as AI Issuers Disrupt Debt Market Safety
When financing becomes more costly, firms typically reduce their issuance of bonds. Tech companies have instead been ramping up this year, and discussions this week regarding potential significant financings from SpaceX and Broadcom Inc. have only intensified investor concerns about the impending wave of debt. Large technology firms, often referred to as hyperscalers, are prepared to accept elevated yields as they seek financing to support investments in artificial intelligence, including data centers and AI chips, with the prospect of substantial profits on the horizon. OpenAI anticipates that its annualised revenue will exceed $70 billion by year-end. However, their readiness to incur debt despite the increasing costs of credit poses a risk to a historically reliable mechanism in debt markets, where escalating borrowing expenses usually dampen issuance and provide investors with respite from additional supply. For a decade through 2025, high-grade debt sales exhibited a negative correlation with borrowing costs, as companies generally refrained from issuing bonds in a declining market, based on data. This year, that relationship has reversed, with yields and the supply of new bonds increasing concurrently.
Companies have sold $1.69 trillion of US corporate bonds this year, reflecting an increase of approximately 30% compared to the same period last year. Concurrently, average yields have risen by about 1.2 percentage points, reaching 5.97% as of Thursday’s close. “Capital expenditure from hyperscalers is expected at around $1 trillion next year, which means AI bond issuance isn’t going to slow down despite the higher-rate environment,” said Scott Schulte. “There’s a lot of investor concern about the market’s ability to absorb all the supply, especially when several European elections coming up may push global yields higher.” Concerns are manifesting in credit derivatives and risk premiums associated with numerous technology firms, which generally experienced an uptick on Wednesday and Thursday following reports of substantial financing activities within the tech sector. Sources have reported that Elon Musk’s SpaceX is engaging in discussions with banks and investors to secure $40 billion for the purpose of acquiring chips from Nvidia Corp. It would rank among the largest debt financings in the context of AI development. The transaction is anticipated to be finalised in the upcoming year.
Broadcom Inc. is reportedly outlining plans for a significant transaction aimed at facilitating OpenAI’s acquisition of specialised AI chips that both entities are collaboratively developing, according to sources this week. That occurred shortly after Broadcom initiated the acquisition of $60 billion in AI chip financing aimed at supporting Anthropic PBC and other enterprises. Even if this fundraising doesn’t occur this year, the transactions highlight the persistent influx of debt entering the market. Rising yields may have limited influence on their capital demand: a rise of 0.25 to 0.75 percentage points in credit spreads would primarily alter the composition of issuance for hyperscalers, with a greater portion of borrowing shifting to the short end, as noted by strategists led by Craig Nicol. “Price-insensitive” supply is how Hans Mikkelsen articulated it in a note to clients in late September, highlighting both artificial intelligence-related activity and M&A. He anticipates that spreads will expand further to account for the additional supply. For the majority of other companies, increasing yields will dampen issuance, as demonstrated this week.
In the United States, corporations issued only $11.4 billion in notes, falling short of the anticipated $25 billion to $30 billion projected by dealers. This comes as average yields for investment-grade firms worldwide have climbed to approximately 5.5%, nearing their peak levels observed since the financial crisis. They were below 5% in early August. In Europe, bond sales reached €16.2 billion this week, falling short of even the most pessimistic estimates in weekly survey. Yields are experiencing an upward trajectory due to a variety of factors at play currently. Alongside corporate financing for AI, there has been an increase in government borrowing, and concerns regarding inflation have intensified in recent months due to the ongoing standoff between the US and Iran. It is challenging to determine the precise moment when funding officers will opt to increase debt levels or exercise restraint over time. Nevertheless, the rolling average of bond sales among high-grade firms worldwide has generally aligned with funding costs, albeit with some delay, according to data. “We have been working on a number of transactions that for now haven’t seen the light of day yet because of the sticker shock,” said Antoine Baudron. “Internally, they are not ready as these are not the levels they were expecting.”
