Credit spreads for tech companies pushing to build AI have widened and are expected to widen further later this year as debt levels rise. This could stress heavily debt-laden technology infrastructure builders known as neo-clouds and large cloud computing hyperscalers. Cyclical investments among cloud computing companies, artificial intelligence software companies, and chipmakers could help Neocloud avoid some of this cost, but it also means more expensive corporate debt could spill over across the sector. Spread is the difference in yield between two bonds of the same maturity but different credit quality. Corporate bonds are typically valued at the difference between them and Treasury bills of similar maturity. Widening spreads suggest that investors believe default risk is greater and are willing to pay more for that risk. Hyperscalers continue to ramp up investments, Google has raised its capital spending forecasts for 2026 and 2027, and credit quality issues have become a bigger concern for investors. “Hyperscalar spreads are widening as we speak, and[credit default swaps]are widening pretty significantly,” Torsten Slok, chief economist at Apollo Global Management, told CNBC. “Oracle’s CDS is at the same level as 2008. At the same time, hyperscalers’ CDS is also bottoming out. This trend is definitely not on our side.” Mizuho analysts warned over the weekend of widening spreads, especially for smaller, debt-heavy neoclouds. “We have also heard concerns about NeoCloud generating negative free cash flow, widening credit spreads and capital raising concerns,” Mizuho’s Vijay Rakesh said in a client note. Neocloud CoreWeave’s total debt is approximately 739 times its equity, while Nebius’ debt-to-equity ratio is 131. Applied Digital has a debt-to-equity ratio of 172, according to FactSet data. By comparison, the relative debt burden of large cloud companies is much lower. Alphabet’s total debt equity stood at approximately 18 at the end of the June quarter. As of the end of the March quarter, Amazon was trading at 51x and Microsoft at about 30x. Widening spreads and changing risk landscape Corporate credit spreads are expected to widen from the second half of this year through 2027. “We expect U.S. credit spreads to remain in a wide range in the third quarter, widen in the fourth quarter and tighten through 2027,” Matthew Misch, head of credit strategy at UBS, said in a June 24 note to clients. “Credit returns are unlikely to compensate investors for the risk background (in the second half of this year),” he warned. Much of the high-tech lending, especially on the frontier, is done outside of standard bond issuance channels, and some of it is taken off the books entirely. Analysts still expect more scrutiny as computing ramps up. “As the multi-year AI investment cycle continues, we expect to see more nuanced exposure and pricing decisions,” Amanda Lynam, chief credit strategist at Goldman Sachs, said on July 9. “We will ultimately need a variety of financial markets to meet funding needs,” including syndicated credit markets, private markets, joint venture financing structures, and international financial capital. The bond market has already struggled in recent weeks to absorb a flood of bond issuance by Nvidia, SpaceX, Amazon and others. The relatively low interest rates secured on bonds issued by Nvidia and SpaceX flopped in the secondary debt market earlier this month, while Amazon had to settle for higher-than-its-base interest rates, the Wall Street Journal reported on July 12. Cyclical Funding Risks Cyclical investments in technology, such as the backstop arrangements that Nvidia offers to NeoCloud customers, could exacerbate or insulate the effects of higher debt costs. “(NeoCloud) is already struggling to raise investment capital at the current bargain base price of $50 billion per GW. To this end, Nvidia is now becoming more directly involved in financing,” Seaport analyst Jay Goldberg said in a July 15 letter to clients. Neoclouds can also create special debt agreements for specific projects that can use the hyperscaler’s customer credit rating, which gives the customer some protection. “CoreWeave did exactly that for its last data center capital investment,” Paul Meeks, head of technology research at Freedom Capital Markets, told CNBC. However, this type of protection does not apply to the cloud computing sector as a whole. The Bank for International Settlements, the central bank regulator, warned this month that heavy use of debt in the context of circular finance could lead to failure. “Early commitment competition through debt and circular loans also increases the likelihood of failure,” Pritchai Runcharoenkitkul wrote in a July 7 article for BIS. The bank’s analysis found that there was overinvestment of 1.5 times the required level, and that “stress in one company could spill over to other companies through a chain of financial exposures.” Overinvestment, combined with the paradoxical combination of frontier competition and mutual investment, is causing some investors heartburn. “My biggest concern is the creditworthiness of the competing companies,” Dan Alpert, founding partner at Westwood Capital, told CNBC.
