Big Tech CDS Hits Record as $244 Billion AI Bond Surge Stokes Market Stress

Warnings are mounting over the credit risk of major technology companies including Nvidia, Alphabet and Meta. Credit-default swap premiums, a gauge of default risk, have climbed to record levels. Some bonds issued by big tech companies to finance artificial intelligence investment have had to offer yields of more than 7% — a level associated with junk-rated debt — just to attract buyers. That is fueling concern that debt-driven AI spending and so-called circular deals among big tech firms — in which Company A invests in Company B and Company B uses the money to buy Company A’s products — may be reaching their limits. If those credit risks materialize, big tech could cut AI infrastructure spending and set off a broader slump in memory-chip demand.

The Financial Times and Bloomberg reported that on July 27, five-year CDS premiums for major big tech bond issuers rose to the highest levels on record. CDS premiums are used as the basis for derivatives that hedge against bond defaults. A higher premium signals a greater perceived risk that an issuer could fail to repay its debt.

Among major tech companies, Oracle posted one of the steepest increases since the end of last year, with its CDS premium rising from 1.44 percentage points to 2.15 percentage points. That means an investor hedging against a default on $10 million of five-year Oracle bonds would have paid $144,000 at the end of last year, versus $215,000 now. Nvidia’s CDS premium also nearly doubled over the same period, climbing from 0.42 percentage point to 0.82 percentage point. CDS premiums for Meta, at 0.92 percentage point, Amazon, at 0.67 percentage point, and Alphabet, at 0.64 percentage point, have also risen sharply.

The jump in big tech CDS premiums reflects mounting market concern over massive debt-funded AI investment. According to Dealogic, six major tech companies — Nvidia, Alphabet, Amazon, Meta, SpaceX and Oracle — have issued $244 billion of corporate bonds this year. That is more than double their combined bond issuance of $108 billion last year.

Doubts are also growing about the financial firepower of big tech companies. Even as capital spending accelerates, the outlook for AI-driven earnings and cash generation remains unclear. Alphabet and Tesla recently said on their second-quarter earnings calls that free cash flow, defined as cash flow from operations minus capital expenditures, had turned negative. Their shares fell sharply afterward.

Concern is also building over unconventional deal structures centered on Nvidia. One example is an arrangement in which money invested in companies such as OpenAI is then used by those companies to buy Nvidia’s AI chips. Bloomberg cited as leading examples Nvidia’s planned $250 billion payment guarantee for OpenAI and a $500 billion investment project under discussion with SK Group.

Capital markets are already struggling to absorb the flood of corporate bonds issued by big tech companies. The Financial Times reported that debt tied to Meta’s $12 billion data center under construction in Texas has seen yields rise to 7.5%, a level associated with high-yield bonds, signaling a drop in bond prices. “A remarkable situation is unfolding,” John Aylward, chief investment officer at Sonar Asset Management, said. The unpredictability of the pace and cost of AI financing is causing a serious crisis of confidence, he added.

There is also concern that rising credit risk at big tech companies could spill over into the broader corporate bond market. Bloomberg reported that as of July 23, the duration-times-spread, or DTS, of six hyperscalers had risen to 8.6%, above 7.3% for six major US banks including Goldman Sachs.

DTS measures a company’s influence on overall credit risk in the corporate bond market. It is calculated using bond duration and the spread over US Treasuries. A higher reading indicates a greater potential negative effect on risk in the corporate debt market.

Bloomberg said that if investors begin to question returns on AI infrastructure spending, the resulting repricing could ripple across the broader bond market.

Hwang Jung-soo, New York correspondent, and Kim Dong-hyun, reporter, hjs@hankyung.com