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Morgan Stanley manager flags AI debt concerns for Big Tech

Created at 8 Jul · 7:15 PM1 source↑ Market-relevant
IN SHORT

A top Morgan Stanley bond manager is flagging potential risks in the significant debt being issued by Big Tech companies to fund AI projects. Vishal Khanduja noted that credit risk may be undervalued, citing Amazon's recent $25 billion bond sale as a surprise.

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Key Numbers

$25 billionAmazon bond sale amount
$159 billionDebt issued by Amazon, Meta, Alphabet, Oracle combined
8%Big Tech's share of US corporate bond market
$7 trillionEstimated AI debt market by 2029

Who's Involved

Vishal Khanduja
Head of broad markets fixed income at Morgan Stanley
Morgan Stanley
Bank managing bond portfolios
Amazon
Tech giant planning significant bond issuance
Meta
Tech giant among large AI borrowers
Alphabet
Tech giant among large AI borrowers
Oracle
Tech giant among large AI borrowers
Morgan Stanley manager flags AI debt concerns for Big Tech

↳ Why This Matters

The increasing reliance on debt by Big Tech for AI investments could signal potential over-borrowing and an underestimation of credit risk, potentially impacting bond markets and the financial health of these technology giants.

Key facts

  • Big Tech companies are raising billions in debt for AI projects.
  • Morgan Stanley portfolio manager Vishal Khanduja believes credit risk is undervalued.
  • Amazon's recent $25 billion bond sale was seen as a surprise issuance.
  • Investor demand for Amazon's bonds was reportedly light, and spreads on other tech bonds have widened.
  • Four major tech firms have issued $159 billion in debt this year.
  • Big Tech's share of the US corporate bond market is over 8%.

Troubling signs are emerging in the significant debt issuance by Big Tech companies to fund their artificial intelligence projects, according to Vishal Khanduja, head of broad markets fixed income at Morgan Stanley. Khanduja expressed concern that credit risk is currently undervalued in the market, particularly in light of recent large bond offerings from tech giants.

He pointed to Amazon's plan to sell $25 billion in bonds as a surprise, especially given that many investors believed the company had finished its borrowing for the year. Reports indicated that demand for this latest Amazon bond offering was light, and spreads on other bonds issued by Big Tech companies have widened. A spread refers to the additional yield investors demand for holding a bond compared to a benchmark rate, such as Treasury yields.

Mega-cap tech firms have substantially increased their borrowing this year to support soaring capital expenditure for AI initiatives. In the first five months of 2024, Amazon, Meta, Alphabet, and Oracle, identified as major borrowers in the AI sector, collectively issued $159 billion in debt. As of the end of May, Big Tech represented over 8% of the total U.S. corporate bond market, a record high according to Bank of America. A separate analysis from SemiAnalysis estimates the AI-linked debt market could expand to $7 trillion by 2029, potentially making it the second-largest asset-backed securities market after mortgage bonds.

Frequently asked questions

A bond spread is the difference in yield between a specific bond and a benchmark rate, such as U.S. Treasury yields. A widening spread indicates that investors are demanding higher compensation for the perceived risk of holding that bond.

These companies are significantly increasing their capital expenditures to invest in artificial intelligence, which requires substantial funding for hardware, data centers, and research and development.

Light investor demand suggests that fewer investors are willing to purchase the bonds at the offered yield, potentially indicating concerns about the issuer's creditworthiness or the overall market conditions.

What Happens Next

01Further monitoring of Big Tech bond issuance and investor demand.
02Analysis of widening credit spreads for tech company bonds.
03Tracking the growth of the AI debt market towards its projected $7 trillion by 2029.

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How It Developed

Vishal Khanduja, head of broad markets fixed income at Morgan Stanley, expressed concern over Big Tech's AI-fueled debt issuance.
He indicated that credit risk might be undervalued in the current market.
Khanduja cited Amazon's $25 billion bond sale as a surprise, suggesting the tech giant may be borrowing excessively.
Investor demand for Amazon's recent bond offering was reportedly light, and spreads on other Big Tech bonds have widened.
Big Tech companies have increased borrowing significantly this year for AI-related capital expenditures.
Amazon, Meta, Alphabet, and Oracle have collectively issued $159 billion in debt in the first five months of the year.
Big Tech's share of the total US corporate bond market reached a record high of over 8% by the end of May.
An estimate suggests the AI debt market could reach $7 trillion by 2029, potentially becoming the second-largest asset-backed securities market.

Sources

T1
A top Morgan Stanley bond manager flags problems brewing in Big Tech's AI debt bingeBusiness Insider

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