Fears surrounding artificial intelligence debt have eased slightly after recent market volatility, but more tests lie ahead. Oracle is set to hold its Investor Day on Wednesday, while hyperscalers Alphabet and Amazon.com are scheduled to report quarterly results after market close on Wednesday and Thursday, respectively.
Credit markets have been on edge due to a surge in AI-related debt, though concerns have lessened recently. Meta Platforms' announcement of a $95 billion stock offering on Monday helped reduce its credit-default swap spreads, which had risen last week following the company's negative free cash flow report for the third quarter. Other CDS spreads had also increased but have since retreated.
Investors had anticipated Meta to announce a large bond deal shortly after its earnings release, but the absence of such an announcement came as a relief. 'Just the absence of the bond deal itself is a direct catalyst for AI-related spread tightening,' said Richard Cheng, head of Nuveen's investment-grade corporate sector team. Credit spreads tightening indicates growing investor confidence in bond issuers.
Analysts believe the recent market action suggests that credit fears may have been overblown. Paul Meeks, head of technology research at Freedom Capital Markets, expects these improved sentiments to continue as companies announce their quarters over the next few weeks. However, CDS spreads remain wider over the past year due to increased debt issuance and negative free cash flows across the AI sector.
Alphabet and Amazon pose the next significant hurdle for tech bonds as they update their capital expenditure plans and free cash flow forecasts. Analysts expect Alphabet to report a free cash flow of -$2.3 billion and capex of $55.2 billion for the third quarter, while Amazon is expected to report -$9.9 billion in free cash flow against capex of $58.7 billion. Oracle's updates may be more critical for credit markets, as the company has issued $117 billion in long-term debt and is clinging to an investment-grade credit rating of BBB-1.
Off-balance sheet debt adds complexity to the AI debt story, as companies use intricate arrangements for data centers and chip financing that aren't fully transparent. Despite this, hyperscaler credit ratings remain comfortably above A levels, reflecting diversified revenue streams and ample coverage for interest payments.