Tech equity sales renew AI debt-binge worries

This month alone, there’s been an $85 billion share sale from Alphabet and a $75 billion record-setting initial public offering by SpaceX. More are coming, with OpenAI considering an IPO as soon as next year, after rival Anthropic PBC, and Meta Platforms mulling raising equity.

Selling more shares might seem like a positive for bondholders who have been gorging on tech debt all year. After all, that equity bolsters balance sheets, boosting the cushion for creditors if things go awry. However, the rush to raise it, by firms that are often already generating strong cash flow, is also a sign they’re gearing up for heavier spending and probably more borrowing than investors had expected.

“It’s telling us that the amount of capital expenditure that they’re going to do is probably going to go up,” said Tom Murphy, head of investment grade credit at Columbia Threadneedle.

Traders were caught off guard this week by how quickly SpaceX’s blockbuster bonds weakened after they began trading Wednesday. Paper losses for the $25 billion offering rose to about $360 million as of Friday afternoon relative to Treasuries. The company secured an investment-grade rating despite expectations for years of negative cash flow.

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Alphabet’s bonds also softened relative to Treasuries after the firm announced its equity sale, a reaction some market participants attributed to worries about the Google parent’s spending needs. Risk premiums on US high-grade tech bonds have climbed overall this month, to 0.79 percentage point as of Thursday, compared with 0.74 percentage point at the end of May.

AI Demands
Some strategists are already lifting forecasts for tech companies’ capital expenditure. JPMorgan Chase now expects $5.5 trillion of spending tied to AI and data centers through 2030, an increase of about $400 billion from its estimate in November. That will translate into more debt issuance, according to JPMorgan. The bank is forecasting $2.1 trillion of data center financing to be raised in high-grade bond markets over the next five years, up from November’s prediction of $1.5 trillion.

That’s what some investors are fretting about. SpaceX said this week that it had $100.8 billion of cash on its books. S&P Global expects the business to burn through about $113 billion by the end of next year, and roughly $90 billion in 2028.

Tech companies are generally jockeying to build more data centers and buy more chips to generate as much revenue from AI as possible. The big question, of course, is who will spend those vast sums of money only to see their products sputter. The history of the industry is littered with firms that looked promising, only to fade away.