Credit spreads for the tech companies funding the AI buildout are widening, and UBS expects them to widen further in the fourth quarter. Neoclouds carry the heaviest leverage — CoreWeave's total debt runs about 739 times its equity. The Bank for International Settlements warned this month that debt and circular financing make a bust more likely.
Credit spreads for the tech companies driving the AI buildout are widening, and are expected to expand even more later this year as debt levels increase. That could put stress on the heavily indebted infrastructure builders known as neoclouds, as well as the larger cloud computing hyperscalers.
A spread is the difference in yield between two bonds of the same maturity but different credit qualities; widening spreads suggest investors see greater default risk.
Neoclouds carry much larger relative debt loads
CoreWeave has total debt of about 739 times its amount of equity, according to FactSet data. Nebius carries a debt-to-equity ratio of 131, and Applied Digital 172.
By comparison, the big cloud companies carry much smaller relative debt loads. Alphabet's total debt-to-equity stood at about 18 as of the end of the June quarter, Amazon's at 51 and Microsoft's at about 30 as of the March quarter end.
Hyperscalers are continuing to boost their investments. Google is raising its capex projections for both 2026 and 2027, and credit quality is becoming more of a concern for investors.
Spreads are expected to widen in the fourth quarter
UBS sees the pressure building later in the year. US credit spreads should remain broadly rangebound in Q3 before widening in Q4 and decompressing into 2027, Matthew Mish, the bank's head of credit strategy, wrote in a June 24 note to clients. He cautioned that credit returns are unlikely to compensate investors for the risk backdrop in the second half of the year.
Apollo Global Management chief economist Torsten Slok told CNBC that spreads are widening out for hyperscalers, with credit default swaps widening out quite substantially. According to Slok, CDS for Oracle is at the same level it was at in 2008, and "the trend is certainly not your friend".
Debt markets have already been struggling to swallow the recent bond issuance from Nvidia, SpaceX and Amazon. Bonds from Nvidia and SpaceX at relatively low rates flopped in the secondary debt market earlier this month, while Amazon had to settle for rates high by its standards, the Wall Street Journal reported on July 12.
Circular financing draws a BIS warning
Circular investments within the tech sector, such as the backstopping agreements Nvidia provides to its neocloud customers, could either aggravate or insulate against the effects of larger debt costs. Seaport analyst Jay Goldberg wrote to clients on July 15 that Nvidia is now becoming more directly involved in financing. Neoclouds can also create specialized debt contracts that let them use the credit ratings of their hyperscaler customers — CoreWeave did just that for their last data center capex, Freedom Capital Markets tech research head Paul Meeks told CNBC.
However, that protection does not extend to the cloud computing sector as a whole. The Bank for International Settlements warned this month that ample use of debt in the context of circular financing could lead to a bust, in a July 7 piece by Phurichai Rungcharoenkitkul. Its analysis suggests overinvestment of 1.5 times the necessary level, and that stress in one firm could cascade to others through chains of financial exposures.
Dan Alpert, founding partner of Westwood Capital, told CNBC that his biggest concern is the credit quality of these companies that find themselves competing.
Source: CNBC
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