SpaceX Bankers Kick Off Marketing for Debut High-Grade Bond Sale

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1:27Carol Massar:Now we're helping companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business. IBM. Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to Bloomberg Business Week with Carol Masser and Tim Stenevek on Bloomberg Radio. We've got Robert Shipman with us, Bloomberg Intelligence Senior Technology Credit Analyst. He joins us here in the Bloomberg Interactive Brokers Studio. Okay, I'm going to ask the simple question here, which is SpaceX just raised roughly$86 billion in this IPO. Why are they selling billions of dollars of bonds right now?

2:10Well, they need money. Though they said this morning that they had$100 billion of cash, they're going to be spending a lot more over the next few years than they make. probably in the neighborhood of$30 to$40 billion of negative free cash flow for the next few years. On top of that, they have a$20 billion term loan due next September that are going to use the proceeds from this bond deal to pay off. So they're just getting ahead of the curve like everybody else. Why are the alphabets and Amazons and Metas raising so much? It's because over the next few years, they're going to be spending a lot more.

2:44Carol Massar:And because they can. And because they can. I mean, the market's receptive, right? Investors are interested. Well, not only that, the rating agencies have just teed them up for an enormous inaugural launch. I mean, giving them BAA1, BBB, BBB plus ratings basically tells the bond market, you don't have to worry about junk ratings. You don't have to worry about liquidity. Just go run your business over the next three or four years, and you're going to grow into these ratings. If you just looked at this balance sheet, you wouldn't say it looked anything like a solid, stable investment grade name.

3:16But in fact, they told them they are.

3:18Carol Massar:Okay, just because I'm going to be sarcastic here. So we don't have to worry about anything. I mean, it's not like the ratings agencies ever get anything wrong. It's like your favorite thing. I mean— Because think about 2008. Like, you bring us back there. So is—can we say it's the same situation? Yeah, I'd say if you were concerned, you should simmer down. That this is going to be a business that has access to tremendous amounts of capital, because they should. It's sort of like, I just think that Elon Musk is to this generation that Warren Buffett was to the last. Like, you put your full faith and trust in Elon, you're shaking your head.

3:57I'm shaking my head because one is a - When it comes to creating value, that's what it does. There are polar opposites when it comes to balance. Oh, sure. Listen, the strategies are different, but value creation is what's the same. And what people are looking now, they're looking at the future of AI. and nobody I think can see the future more than Elon Musk sees it.

4:14Carol Massar:Well, we had a great, I'm just going to bring people into this. We had a great chat. You know where I'm going. We were in Las Vegas at an event on Thursday. And this, unfortunately, this wasn't even on mic. We were just continuing the conversation. Well. Or maybe not attribute it to who? We were talking to an executive who has experience in the space. and he was like, I wish I were 20 years younger to just see what is coming, not just from SpaceX, but from the other firms that are working on this stuff. That is how cool of a moment we're in right now. He was upset that he was going to miss it, right?

4:47Carol Massar:Yeah. Well, good for you. I don't travel to Las Vegas. I'm here reading S1s and 10Ks, working on spreadsheets and models. You don't need to be here to read those. But it was a great deep dive into the AI world in a different way for us. because we are really trying to understand all the twists and turns of it because I think it's very easy to look at it at a very broad macro simplistic level. But there's a lot of stuff going on underneath. I think right now people are sort of wondering what AI really is. For most, it's just a chatbot. It's like I've got a cough. What drug should I take? And I just don't think that's it.

5:23Other people are looking for this to be 10 years out the future and why we're not flying around in jets and spacecrafts and hoverboards. So it's someplace in the middle is that these networks right now are being built, right? I like to say like when you talk about this baseball analogy or like we're in the bottom of the third, we're just warming up. We haven't even started the ballgame yet. So data centers are being built. There's tens, hundreds of billions of dollars that have been put in. What you're starting to see, though, are enterprise customers actually writing checks. You saw that in the first quarter.

5:54That's why you saw stocks explode in a good way. Not when you talk about SpaceX, you don't like using terms like that. But you saw them explode higher because confidence that AI was starting to be monetized is coming. And we're just starting to see flavors of that. And that's going to flow through cash flows. But it's probably not going to flow through until an inflection point in 2028. So you're going to see a lot more borrowing until then. But then once we're going to get to 2028, you guys are going to have me on. And you're going to say, why are these companies buying back so much stock? And I want to say, because they have so much cash, they don't know what to do with it.

6:26Carol Massar:So let's go back to SpaceX being negative free cash flow a few years, as you mentioned earlier. $85 billion in this IPO because of what they got after that initial raise. $20 billion of bonds. How long does that last, SpaceX? So it's going to last a few years. SpaceX has committed to keeping leverage between two and three times. So what that means is over time, as EBITDA grows, they're going to be able to grow total amounts of debt. But if they're burning, say,$35 or$40 billion a year, and they have$20 billion of refinancing needs, it takes them three, four years out. I think you're going to see SpaceX again back in the corporate markets for another$20,$25,$30-odd billion next year.

7:13And then you're going to see them the year after that for another$25,$35,$40,$50-odd billion the year after that. They're going to grow into their balance sheet. But quite frankly, they have a lot less debt than their AI hyperscaler peers right now. And people are a little bit confused. Like, what is this company? Is it an aerospace and defense company? Is it a communications company? Is it a tech company?

7:34Carol Massar:It's all three. It's a little bit of all of them. And I actually think it's going to end up pricing cheap to all of their comps. And that's what's going to get so many people excited and involved tomorrow. I think if they do a$20,$25 billion deal, you're going to see order books that are going to be in the neighborhood of$125 billion. How do you determine, though, at some point that everybody's just kind of a little bit of FOMO and just wants a piece of everything, especially on something with artificial intelligence? The smartest kids in the room on this are still saying we're early in, and we're not quite sure where it all goes.

8:12Yeah, it's interesting. You know, from an equity perspective, people have been looking at this name for many, many months, right? prepping for the IPO. From a bondholder perspective, they weren't necessarily. And my guess is probably three quarters of the people that buy the bonds tomorrow don't even know what SpaceX does. And what they're going to do is buy first, ask questions later.

8:30Carol Massar:But isn't that stupid? Not necessarily, right? If you go to a flea market and you see a really good deal, it's still a good deal whether or not you know the exact value. Here, the rating agencies are telling you, don't worry. I actually don't think you should worry either. I think they have a key man that makes a big difference. I think they have a differentiated product, a diversified product. They also have this huge backstop of cash that if they do need to pull back, they can do so. And again, most of their peers that they're going to be comping to are higher rated and likely to trade tighter.

9:05So when you start launching a deal tomorrow, remember also nobody owns this name. No one has exposure. Everyone has tons of exposure now to Alphabet and Amazon and Meta and Microsoft.

9:17Carol Massar:But Robert, are the credit agencies accurately assessing the risk of a company that's so identified with one individual and the way he thinks and the way he innovates and disrupts? Yes, he's got good leaders in place, or so we believe, but he's on a whole other scale, most would say. So are the credit agencies assessing that risk correctly? What would happen, God forbid, if something happened to Elon tomorrow? Well, you could say that about a lot of almost any high multiple company. I think you can. But here's the differential. One is when you need to raise potentially hundreds of billions of dollars of debt, you need to be investment grade.

10:02Just think back about the poster child for the AI market, Oracle. Why did they come out originally and issue equity and say we're committed to investment grade? Because you can't run this business and be a junk rated name with 100 plus billion dollars of debt. I think that's ultimately where SpaceX might be headed. They've committed to being investment grade because they need to be investment grade. And again, as they grow into their balance sheet, that'll create a lot more financial flexibility. But, you know, I'm much less concerned about Keyman than I am excited about what I think he ends up bringing to the table.

10:36I think the type of visionaries that exist in this market, like you said, the smartest people in the room, they're seeing stuff that we're not seeing. They're seeing stuff that we can't even dream of seeing, and they're executing on it. And I think that Musk is going to bring more confidence to people than concerns.

10:54Carol Massar:You mentioned some of the other companies that have tapped the debt markets, Alphabet, Amazon. Others have raised more than$300 billion of debt just today, just since November. It's just a staggering figure. That's according to strategists over at JPMorgan Chase. What is it about this moment that's driving this? Well, this is a complete revolution. I mean, we are changing the way that people think about growth in the technology space. You know, trillion-dollar companies growing at double and triple-digit rates are somewhat unheard of. These companies had become utilities and had nothing to do with their capital other than pay huge dividends and massive buybacks.

11:37And instead, they found a way to grow faster than anyone could have ever imagined. And so, again, it's hard when you're in a zone where you're spending the money first and you don't see what the final outcome is. It's like if you're redecorating your kitchen, you know, they tear your old one apart. It doesn't look that great. And then, lo and behold, it's finally finished and you're like, wow, this is awesome. And I think that's where we're going. And I just think the growth rates that we're seeing that appear achievable allow these companies to grow into these new balance sheets.

12:09Carol Massar:Are you comfortable with the debt raise of all the hyperscalers? Are there some that you're more concerned about? Because it seems like you're very comfortable with Elon and SpaceX. Yeah, my team is going to laugh at me because they've heard me say this so many times. Most of the names that are raising all this money would be considered the Mount Rushmore of corporate credit, AA's and AAA's. Obviously, as you go down the scale for a name like an Oracle, which is BBB, or a CoreWeave, which is non-investment grade, the concerns and risks are much higher. But the ones that are spending the vast majority of money, when you're hearing that there's going to be a trillion dollars of CapEx spent next year, five trillion over the next five years, it's in those Mount Rushmore names.

12:51And they have the balance sheet flexibility to do so. Again, I see it as much more of an opportunity from a bondholder's perspective. You can buy the best, brightest names for much cheaper than you ever could historically, get much better returns, and then ride out growth over time. So again, I think that there's much more upside owning the debt of these names than the risk that people think exists.

13:17Carol Massar:Amazing stuff. Robert Shiffman, thank you so much. He is Bloomberg Intelligence Senior Technology Credit Analyst.

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