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.