(June 28): Tech companies are selling stock like it’s the dot-com boom, and some investors fear that’s a bad sign for bondholders.
This month alone, there’s been an US$85 billion (RM351.7 billion) share sale from Alphabet Inc and a US$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 Inc 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 US$25 billion offering rose to about US$360 million as of Friday afternoon relative to Treasuries. The company secured an investment-grade rating despite expectations for years of negative cash flow.
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 & Co now expects US$5.5 trillion of spending tied to AI and data centres through 2030, an increase of about US$400 billion from its estimate in November.
That will translate into more debt issuance, according to JPMorgan. The bank is forecasting US$2.1 trillion of data centre financing to be raised in high-grade bond markets over the next five years, up from November’s prediction of US$1.5 trillion.
That’s what some investors are fretting about. SpaceX said this week that it had US$100.8 billion of cash on its books. S&P Global Ratings expects the business to burn through about US$113 billion by the end of next year, and roughly US$90 billion in 2028. The company will probably have to sell more debt and equity as a result, the ratings firm said this month.
Tech companies are generally jockeying to build more data centres 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 — such as Digital Equipment Corp or Lycos.
The potential downside of funding a loser is particularly acute in the debt markets. Bond investors rarely earn the spectacular returns that shareholders can reap in the best scenarios, but they can lose hefty amounts of principal in the worst case.
Bondholders are being asked to take obsolescence risk for decades: SpaceX’s debt sale this week included 20- and 30-year bonds, as did Nvidia Corp’s this month. Alphabet sold 100-year bonds in sterling in February as part of a larger offering.
Buying these obligations requires faith in, among other things, a company’s ability to spend prudently to profit from AI, and management’s willingness to either curb investment when cash is constrained, or to raise additional equity.
“Bondholders are inclined to cheer equity-raise announcements as a signal for slower balance-sheet deterioration,” said Anthony Woodside, head of multi-sector fixed income and investment strategy at L&G — Asset Management, America. “However, it really means there’s a lot more debt coming too — equity is not replacing debt, it’s supplementing it.”
For now, many investors aren’t too worried. Arvind Narayanan, co-head of investment-grade credit and senior portfolio manager at Vanguard Group Inc, sees equity sales in the tech sector as a “very positive signal” for bond investors. The companies are bringing in cash, and stock sales suggest they see enough promise in their AI plans to ask shareholders to accept dilution.
But there have been signs of fatigue. Money managers are becoming more selective and demanding higher returns on AI debt, while issuers are increasingly tapping overseas markets to avoid overwhelming US buyers.
“They could force a lot of debt into the market, but they would have to pay higher and higher spreads,” said Jeff Schrom, lead credit sector and senior portfolio manager at Robert W Baird & Co, talking broadly about hyperscalers.
Uploaded by Magessan Varatharaja
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