AI Debt Explosion Has Traders Searching for Cover: Credit Weekly

Core Insights - Tech companies are preparing to borrow hundreds of billions of dollars for AI investments, prompting lenders and investors to seek protection against potential defaults [1] Group 1: Credit Derivatives and Market Activity - Demand for credit protection has more than doubled the cost of credit derivatives on Oracle Corp.'s bonds since September, with trading volume for credit default swaps tied to Oracle reaching approximately $4.2 billion over six weeks ending November 7, up from less than $200 million in the same period last year [2] - There is a renewed interest in single-name credit default swaps (CDS) among clients, particularly as hyperscalers have increased their borrowing and exposure [3] - The overall volume for credit derivatives tied to individual companies has increased by about 6% over the six weeks ending November 7, reaching approximately $93 billion compared to the same period a year ago [12] Group 2: Market Trends and Future Projections - Investment-grade companies are projected to sell around $1.5 trillion in bonds in the coming years, with significant recent bond sales tied to AI, including Meta Platforms Inc. selling $30 billion in late October and Oracle offering $18 billion in September [5] - Tech companies, utilities, and other AI-related borrowers have become the largest segment of the investment-grade market, displacing banks [6] - Some of the largest buyers of single-name CDS on tech companies are banks, reflecting their increased exposure to the tech sector [7] Group 3: Investor Sentiment and Concerns - There is a growing concern among money managers and lenders regarding the effectiveness of generative AI projects, with a report indicating that 95% of organizations are seeing no return from these initiatives [9] - Recent trading activity in credit default swaps for Meta Platforms Inc. and CoreWeave has increased, indicating heightened market interest following significant bond sales [10]