By Caleb Mutua
Credit markets grew more fearful about tech debt on Thursday, sending the cost of protecting Broadcom Inc. and SpaceX debt against default to record highs, after disappointing results from Alphabet Inc. intensified fears about the industry’s massive bets on artificial intelligence.
In the credit derivatives market, the cost of protecting Broadcom Inc.’s debt against default for five years rose by about 10 basis points to 175.4 basis points a year, the highest closing level on record, according to ICE Data Services. The gauge rises as investor worries grow.
A similar gauge for SpaceX rose about 20 basis points to 266.5 basis points, its highest closing level since it started trading earlier this year. Meanwhile, CDS tied to Alphabet rose by about 5.1 basis points to about 84 basis points, the biggest increase in basis point terms since July.
Investors are looking to hedge their credit exposure after the Google and YouTube parent posted weaker-than-expected revenue and earnings per share for the third quarter. That includes ad sales, critical for financing Alphabet’s massive AI investments.
Tech companies are expected to continue borrowing heavily to help fund their AI investments.
“The issuance pipeline remains heavy, and deteriorating free cash flow and still-rising capex guidance point to more supply ahead,” said Tony Trzcinka, an investment-grade portfolio manager at Impax Asset Management. “In our view, the spread widening to date reflects a combination of technical overhang and weakening fundamentals.”
Among the upcoming debt is a bond sale that could be as much as about $21 billion, planned for as soon as early next year, as part of a $63 billion funding package that Broadcom has pulled together to help finance chips for AI developer Anthropic PBC, Bloomberg reported Tuesday.
Tale of Two Markets
While equity investors could see huge gains if AI investments pay off, debtholders bear the pain if things unravel, said Gavan Nolan, fixed-income-pricing executive director at S&P Global Market Intelligence. Bond investors are laser-focused on capital spending and when AI revenue will be free cash flow positive, he added.
“In some way credit is telling a bit of a different story than equities when it comes to the tech sector,” Nolan said in an interview.
Trading volume for CDS tied to the 10 largest hyperscalers and chipmakers surged more than eightfold this year to $176 billion through last week, according to an analysis of trade repository data by Barclays Plc credit strategist Jigar Patel. Some of the swaps, like for SpaceX, have only started trading in recent months.
Most active are Oracle Corp. swaps, Patel said, with 2026 volume rising by nearly six times from last year’s level to $46.8 billion.
Capex Discipline
Some hyperscalers are starting to show more fiscal discipline. Oracle Corp. said on Wednesday it would undertake just $20 billion of additional capital raises the next several years, through a combination of debt and equity. Its CDS prices fell the most in nearly nine months following the announcement.
“Higher financing costs and questions around adoption have weighed on the AI trade, but this earnings season, hyperscalers have responded with greater capex discipline and more equity funding, easing some of the balance sheet concerns,” said John Lloyd, global head of multi-sector and corporate credit at Janus Henderson.
