Oracle default insurance hits record as AI debt piles up

Big technology borrowers are flooding credit markets with debt to pay for artificial intelligence, and investors are pushing back. They are paying record prices to insure against defaults and asking for higher compensation to lend to the sector. Bloomberg reported Thursday that Oracle ↘ 4.64%, Broadcom ↘ 4.52% and SpaceX are among the companies that have together issued close to half a trillion dollars of new debt this year to build AI infrastructure.bloomberg+1

The repricing is happening in a U.S. corporate bond market worth more than $10 trillion. It shows up in rising prices for credit insurance, more volatile trading and weak returns. Tech has been one of the worst-performing sectors in credit over the past few months, even as trading volumes in tech bonds and credit derivatives have jumped.bloomberglinea

Record insurance costs

On Thursday, Oct. 8, the cost of protecting Oracle debt against default for five years rose about 10.5 basis points to a record close of 261 basis points. Broadcom's five-year credit default swap spread widened 3 basis points to a record 136, according to ICE Data Services figures cited by Bloomberg. Bloomberg said those prices suggest traders see a five-year default risk above 20% for Oracle and about 16% for SpaceX. Even Nvidia ↘ 1.43% is priced at more than 7%.bloomberglinea

The selling has built since the summer. Reuters reported in late July that Oracle's swaps were trading around 200 basis points. IFR reported that a record $25.1 billion of Oracle default protection was outstanding as of July 24.reuters+1

"Each new funding announcement is perceived as a new participant in an auction for investors' balance sheets," said Mark Clegg, a senior fixed-income trader at Allspring Global Investments, according to Bloomberg's Spanish-language service.bloomberglinea

More megadeals ahead

Reports of possible new financings by SpaceX and Broadcom, which together could top $100 billion, set off the latest swings. Broadcom is planning another deal only days after launching a $60 billion debt financing to help pay for Anthropic's AI expansion. Bloomberg estimates the chipmaker alone could raise about $600 billion over the next few years. The Wall Street Journal News Corp ↘ 0.54% reported that Oracle is in talks with Apollo ↘ 0.97% and Goldman Sachs The Goldman Sachs Group, Inc. ↘ 1.12% about funding a large chip purchase. SpaceX is reportedly seeking $40 billion to buy Nvidia processors.bloomberglinea

This year has produced nine U.S. high-grade deals of $25 billion or more, the most on record, and most of them came from tech companies.bloomberglinea

Saturation, not distress

So far the strain looks more like a crowded market than weakening credit quality. Most of these borrowers are profitable and have steady cash flow, and the broader bond market has held up relatively well. Still, Steven Kohlenstein, a fixed-income portfolio manager at T. Rowe Price T. Rowe Price Group, Inc. ↘ 0.39%, pointed to the growing concentration of exposure in "the same underlying AI investment cycle." He said this "creates the possibility of correlated risks that may not be fully reflected in current valuations".bloomberglinea