Tech companies hit record credit swaps amid supply worries
On Thursday, credit markets exhibited heightened apprehension regarding technology-related debt, as the cost of insuring against default for Broadcom Inc. and SpaceX reached unprecedented levels. This surge in concern was exacerbated by disappointing results from Alphabet Inc., which amplified anxieties surrounding the industry’s substantial investments in artificial intelligence. In the credit derivatives market, the cost of protecting Broadcom Inc.’s debt against default for five years increased by approximately 10 basis points to 175.4 basis points per annum, marking the highest closing level on record, as per reports. The gauge rises as investor concerns intensify. A comparable measure for SpaceX increased approximately 20 basis points to 266.5 basis points, marking its highest closing level since it commenced trading earlier this year. Meanwhile, CDS associated with Alphabet increased by approximately 5.1 basis points to around 84 basis points, marking the largest rise in basis point terms since July.
Investors are seeking to mitigate their credit exposure following the announcement from the parent company of Google and YouTube, which reported revenue and earnings per share for the third quarter that fell short of expectations. That encompasses advertising revenue, which is essential for funding Alphabet’s substantial investments in artificial intelligence. Tech companies are anticipated to persist in their substantial borrowing to finance their investments in artificial intelligence. “The issuance pipeline remains heavy, and deteriorating free cash flow and still-rising capex guidance point to more supply ahead,” said Tony Trzcinka. “In our view, the spread widening to date reflects a combination of technical overhang and weakening fundamentals.”
Among the forthcoming obligations is a bond issuance that may reach approximately $21 billion, scheduled for as early as next year, as part of a $63 billion financing initiative that Broadcom has assembled to support the chip requirements of AI developer Anthropic PBC, as reported on Tuesday. Meanwhile, SpaceX has entered into an equipment-finance lease valued at approximately $40 billion to secure the chips essential for advancing its artificial intelligence initiatives. The fixed rate that the company will pay is set to be determined at pricing, which has yet to take place, according to a filing by SpaceX on Monday. While equity investors could see substantial gains if AI investments yield positive results, debtholders will face the consequences if the situation deteriorates, noted Gavan Nolan, fixed-income-pricing executive director at S&P Global Market Intelligence. Bond investors are intensely scrutinising capital spending and the timeline for AI revenue to become free cash flow positive, he added. “In some way credit is telling a bit of a different story than equities when it comes to the tech sector,” Nolan said in an interview.
Trading volume for CDS associated with the ten largest hyperscalers and chipmakers has experienced a remarkable increase, surging more than eightfold this year to reach $176 billion as of last week, as indicated by an analysis. Some of the swaps, such as those for SpaceX, have only commenced trading in recent months. Most active are Oracle Corp. swaps, Patel noted, with 2026 volume increasing nearly sixfold from last year’s level to $46.8 billion. Some hyperscalers are beginning to exhibit greater fiscal discipline. Oracle Corp. announced on Wednesday its intention to pursue an additional $20 billion in capital raises over the coming years, utilising a mix of debt and equity instruments. Its CDS prices experienced the most significant decline in almost nine months following the announcement. “Higher financing costs and questions around adoption have weighed on the AI trade, but this earnings season, hyperscalers have responded with greater capex discipline and more equity funding, easing some of the balance sheet concerns,” said John Lloyd.
