AI Debt Outlook: Focus on Oracle, Alphabet and Amazon

Fears over AI-related debt have eased after a period of volatility. But more tests for AI debt are coming.

Oracle is hosting its investor day on Wednesday. And hyperscalers Alphabet And Amazon.com are expected to release their quarterly results after the market close, on Wednesday and Thursday respectively.

Credit markets are worried about the influx of AI-related debt, although fears have eased somewhat recently. MetaplatformsPlans for a $95 billion stock offering, announced Monday, have helped narrow credit default swap spreads. These gaps had increased last week when the company reported negative free cash flow in the third quarter. Other CDS spreads also increased, although they have since fallen.

Investors expected Meta to market a large bond deal soon after announcing its results, said Richard Cheng, head of Nuveen’s investment grade corporate sector team. The fact that it wasn’t announced was a relief.

“The mere absence of the bond deal itself is a direct catalyst for AI-related spread tightening,” he said.

A credit spread is the difference in yield between corporate bonds and Treasury bills of similar maturity. When spreads tighten, it means investors have more confidence in the bond issuer.

Market developments over the past few days show that investors recognize that “credit fears may have been overblown,” said Paul Meeks, a CNBC contributor and head of technology research at Freedom Capital Markets.

“I expect these positive feelings, maybe not good but better, to continue as companies report their quarters over the coming weeks.”

Nonetheless, CDS spreads have remained wider over the past year due to a sharp increase in debt issuance and free cash flow turning negative in the AI ​​sector. Meta’s CDS spread, for example, is still up 177% year to date, while Amazon’s has gained 129%.

Bond yields also remain high.

“It’s not necessarily fundamentals,” said Jordan Chalfin, an analyst at CreditSights. “It’s more, I would say, 80% driven by technical aspects and sentiment.”

Alphabet and Amazon pose the next big hurdle for tech bonds as they update their investment plans and free cash flow forecasts. MicrosoftResults are also due Wednesday, but the company has not yet issued bonds to pay for its AI spending.

Amazon and Alphabet both reported negative free cash flow in the second quarter and analysts expect this trend to continue.

Analysts expect Alphabet to report free cash flow of -$2.3 billion while spending $55.2 billion on capital expenditures in the third quarter, according to FactSet consensus estimates. Amazon is expected to report free cash flow of -$9.9 billion against investments of $58.7 billion.

S&P Global Ratings estimated in an August report that hyperscalers would have negative free operating cash flow in 2026 and 2027.

Their perspectives will be more critical, Cheng says. “The focus for investors is really on what the trajectory of where investments look like in the hyperscaler space.”

Meeks believes that high investments are a sign of high demand for AI. Hyperscalers have “decided that with all the evidence they have – and they have more than you and I – that it’s worth spending, not just worth it; it was necessary,” he said.

CreditSights’ Chalfin doesn’t expect hyperscalers to announce major new bond issues around their earnings reports. Oracle updates could be more critical for credit markets. The company has issued $117 billion in long-term debt and clings to an investment-grade credit rating of BBB-, the lowest level of investment grade above junk, according to S&P.

“It’s IG’s strongest tech credit, just given that it’s a little more stressed relative to the A-rated names,” he said. “It’s trading more like a high-yield credit, even though it’s IG, and so there’s a lot of investor concern about that.”

One problem in the AI ​​debt story: Balance sheets don’t tell the whole picture. Companies use complex off-balance sheet arrangements to finance data centers and chips, and they are not fully transparent, S&P Global said in a September report.

“There are commitments that they make, for example, in data center leases or chip purchase commitments that are not necessarily treated as debt,” Mark Habib, head of the digital infrastructure sector at S&P Global Ratings, said Monday on CNBC’s “Squawk on the Street.”

S&P is working to provide the market with more visibility into these liabilities “to give a more complete picture of the type of bonds they are actually underwriting,” he added.

Aside from Oracle, the hyperscalers’ credit ratings are all comfortably above A levels, reflecting the fact that they have widely diversified revenue streams, ample coverage for interest payments, and the ability to add leverage if they choose.

Nuveen’s Cheng is not worried, emphasizing that while there has been some credit revaluation, there is no credit crisis.

“They continue to have exceptional credit profiles and strong cash-generating liquidity,” he said of the largest hyperscalers.

“The market is really not concerned about credit quality at this point,” Cheng added. “It’s just the trajectory of investment needs and the debt supply to finance that. Both are going in the same direction – and that’s it.”

Correction: This story has been revised to reflect that Oracle’s credit rating is BBB-, according to S&P. A previous version misrepresented the company’s credit rating.