Concerns Over AI-Related Debt Ease Slightly Ahead of Oracle, Alphabet, and Amazon Updates
Much will become clear following the release of quarterly reports
Today, Oracle will hold its Investor Day, while Alphabet and Amazon will release their quarterly results after the market closes on Wednesday and Thursday, respectively. Microsoft will also report today but has not issued bonds to finance AI expenditures so far.
Credit default swap spreads for other companies have slightly narrowed after a recent widening. However, since the beginning of the year, they remain elevated amid rising debt levels and negative free cash flow in the sector: Meta’s indicator has increased by 177%, and Amazon’s by 129%.
The next test for the bond market will be Alphabet’s and Amazon’s capital expenditure plans and free cash flow forecasts. Analysts expect both companies to report negative figures; Alphabet’s capital expenditures in the third quarter may reach $55.2 billion, while Amazon’s could hit $58.7 billion, according to FactSet’s consensus estimates. Richard Cheng, head of investment-grade corporate bonds at Nuveen, believes investors are primarily focused on the future trajectory of hyperscalers’ capital expenditures.
CreditSights does not anticipate major new bond issuances around the earnings releases. Oracle may attract closer attention: the company has issued $117 billion in long-term bonds and maintains an investment-grade BBB-1 rating, according to S&P. S&P Global also noted that obligations related to data center leases and chip purchases may lie off the balance sheet. Cheng argues that the current situation is not a credit crisis, with the key question remaining future AI expenditures and the volume of debt required to finance them.
