In short
How the AI-driven capex boom by technology hyperscalers is increasing credit supply and testing corporate credit markets, after a long period of low supply concerns.
Guest backgrounds
No guests mentioned; host is Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.
Key claims
Morgan Stanley estimates top tech spenders will commit about $470B this year and $620B next year (over $1T in two years). Roughly half funded by cash flows, half via debt; recent borrowing is coming at discounts with strong investor demand.
Notable examples
hyperscalers issuing tens of billions in short succession; AA issuers paying yields comparable to existing single-A credits, making lower-rated debt look less attractive.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOReflections on the Credit Market Post-Crisis
0:17 to 1:40
An overview of the changes in credit markets since the global financial crisis.
“It's hard to state just how extreme that period was, how many usual relationships and valuation approaches broke.”
Current Trends in Capital Expenditure
1:40 to 3:06
Discussion on the rising capital expenditure by technology companies and its implications.
“companies as they look to build out the infrastructure that supports their cloud and AI ambitions.”
Challenges Posed by Increased Borrowing
3:06 to 3:45
Exploration of the challenges that arise from large borrowing in credit markets.
“After a long period, where generally speaking, investors have rarely worried about excessive supply, these are very large deals coming at very large discounts, and they are moving the market.”
Transcript
Automatic transcript. May contain errors.0:01Andrew Sheets:Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today, a look at a very different type of challenge for credit markets. It's Friday, November 21st at 6 p.m. in Singapore. It's now been well over 15 years since the global financial crisis shook the credit markets to its very core. It's hard to state just how extreme that period was, how many usual relationships and valuation approaches broke. It saw the worst credit losses in 80 years. I think and hope that this record will hold for the next 80. This shock, however, did have a silver lining for the credit market.
0:41Andrew Sheets:After a crisis that was driven by bank balance sheets being too large and complex, these shrank and simplified. After companies saw capital markets suddenly shut, they increased their cash levels and often managed themselves more conservatively. The housing market, long the engine of debt growth in the U.S., saw much tighter lending standards and less overall borrowing. And so all these trends had a common theme, less bond supply. The credit market has seen numerous bouts of volatility in the years since, but these have generally been driven by concerns around the macroeconomy, like the Eurozone crisis or COVID, or they've been driven by company-specific issues, such as weakness around the oil sector in the mid-2010s or the collapse of Silicon Valley Bank in 2023.
1:26Andrew Sheets:The idea that there would be too much borrowing for the level of demand and that this causes market weakness, well, it just hasn't been an issue. Until, that is, now. As we've discussed on this program, there is an enormous increase underway in the amount of capital expenditure by technology companies as they look to build out the infrastructure that supports their cloud and AI ambitions. Morgan Stanley Equity Research estimates that the largest spenders will commit about$470 billion of spending this year and$620 billion of spending next year. That's over$1 trillion of spending in just a two-year period, and it's still growing.
2:06Andrew Sheets:We see a lot of momentum behind this spending as the companies doing it have both enormous financial resources and see it as central to their future ambitions. But all this spending, however, will need to come from somewhere. These are often very profitable companies, and so we think about half will be funded from their cash flows. The other half, well, debt markets will play a big role, especially as these companies are often highly rated and so have significant capacity to borrow more. And over the last few weeks, those spigots have now turned on. Several large technology hyperscalers have been borrowing tens of billions at a clip, and they've been doing this in short succession.
2:46Andrew Sheets:There is some good news here. This new borrowing has been coming at a discount, with the issuers willing to pay investors a bit more than their existing debt to take it on. Demand, in turn, has been very high for this debt. And in most cases, this borrowing is still well below anything that could feasibly trigger rating agency action. But it is raising a very different type of issue. After a long period, where generally speaking, investors have rarely worried about excessive supply, these are very large deals coming at very large discounts, and they are moving the market. If a AA-rated company is in the market willing to pay the same as a current single A, well, that existing single A credit just simply looks less attractive.
3:30Andrew Sheets:As far as problems go, we think this is a generally less scary one for the market to face. But it is a new challenge, something we haven't encountered for some time. And based on the aforementioned spending plans, it may be with us for some time to come. Thank you, as always, for your time. If you find Thoughts of the Market useful, let us know by leaving a review wherever you listen, and also tell a friend or colleague about us today. The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.
From the publisher
As market murmurs about an AI bubble, our Head of Corporate Credit Research Andrew Sheets offers some perspective on the impacts of the increasing demand for debt.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.
Today, a look at a very different type of challenge for credit markets.
It's Friday, November 21st at 6pm in Singapore.
It has now been well over 15 years since the Global Financial Crisis shook the credit markets to its very core. It's hard to state just how extreme that period was. How many usual relationships and valuation approaches broke. It saw the worst credit losses in 80 years; I think, and hope, that this record will hold for the next 80.
This shock, however, did have a silver lining for the credit market. After a crisis that was driven by bank balance sheets being too large and complex, they shrank and simplified. After companies saw capital markets suddenly shut, they increased their cash levels and often managed themselves more conservatively.
The housing market long, the engine of debt growth in the U.S. saw much tighter lending standards and less overall borrowing. And so, all these trends had a common theme. Less bond supply. The credit market has seen numerous bouts of volatility in the years since. But these have generally been driven by concerns around the macro economy, like the eurozone crisis or COVID. Or they've been driven by companies’ specific issues such as weakness around the oil sector in the mid 2010s or the collapse of Silicon Valley Bank in 2023. The idea that there would be too much borrowing for the level of demand and that this causes market weakness, well, it just hasn't been an issue.
Until – that is – now.
As we've discussed on this program, there is an enormous increase underway in the amount of capital expenditure by technology companies as they look to build out the infrastructure that supports their cloud and AI ambitions. Morgan Stanley Equity Research estimates that the largest spenders will commit about $470 billion of spending this year and [$]620 billion of spending next year. That's over $1 trillion of spending in just a two-year period. And it's still growing. We see a lot of momentum behind this spending, as the companies doing it have both enormous financial resources and see it as central to their future ambitions.
But all this spending, however, will need to come from somewhere. These are often very profitable companies and so we think about half will be funded from their cash flows. The other half, well, debt markets will play a big role, especially as these companies are often highly rated and so have significant capacity to borrow more. And over the last few weeks, those spigots have now turned on. Several large technology hyperscalers have been borrowing tens of billions at a clip, and they've been doing this in short succession.
There is some good news here. This new borrowing has been coming at a discount, with the issuers willing to pay investors a bit more than their existing debt to take it on. Demand in turn has been very high for this debt. And in most cases, this borrowing is still well below anything that could feasibly trigger rating agency action.
But it is raising a very different type of issue after a long period where, generally speaking, investors have rarely worried about excessive supply – these are very large deals coming at very large discounts, and they are moving the market. If a AA rated company is in the market willing to pay the same as a current single A, well, that existing single A credit just simply looks less attractive.
As far as problems go, we think this is a generally less scary one for the market to face but is a new challenge – something we haven't encountered for some time. And based on the aforementioned spending plans, it may be with us for some time to come.
Thank you as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen, and also tell a friend or colleague about us today.