Tech IPO hype drowned out by prospects of $1 trillion in debt sales

The prospect of SpaceX’s initial public offering and hopeful listings by OpenAI and Anthropic are fueling IPO excitement on Wall Street, but the current movement in the technology capital markets has nothing to do with stocks. Rather, it’s all about debt.

Four hyperscalers in the technology industry — alphabet, Amazon, Meta and microsoft — Projected to spend nearly $700 billion in capital spending and finance leases this year to meet historic demand for computing resources and power artificial intelligence.

To fund these investments, industry giants may need to shell out some of the cash they’ve accumulated in recent years. But they’re also looking to rack up huge amounts of debt, further raising concerns about an AI bubble and market contagion if cash-guzzling startups like OpenAI and Anthropic hit a growth wall and cut back on infrastructure spending.

In a report late last month, UBS estimated that global tech and AI-related bond issuance more than doubled last year to $710 billion, but that amount could jump to $990 billion by 2026. morgan stanley Building AI is expected to create a $1.5 trillion funding gap, much of which could be filled through credit as companies are no longer able to self-finance capital expenditures.

Chris White, CEO of data and research firm BondCliQ, said the corporate bond market has experienced a “tremendous” expansion in size and that “there is a lot of supply in the bond market right now.”

This year’s largest corporate bond sales were oracle And the alphabet.

Oracle announced in early February that it plans to raise $45 billion to $50 billion this year to build additional AI capabilities. It quickly sold $25 billion worth of bonds on the high-end market. Alphabet followed suit this week, increasing its bond offering to more than $30 billion, following a $25 billion bond sale in November.

Other companies are letting investors know they could get a knock.

Amazon announced last week that it may seek to raise money through a combination of debt and equity, filing a mixed shelf registration. above meta On the earnings call, Chief Financial Officer Susan Lee said the company will seek opportunities to “supplement cash flow with prudent, cost-effective external financing,” which could ultimately allow it to maintain a positive net debt balance.

and as tesla The electric car maker may look to external financing “through additional debt or other means” to shore up its infrastructure, Chief Financial Officer Vaibhav Taneja said after the fourth quarter results.

Some of the world’s most valuable companies have increased their debt by tens of billions of dollars, and Wall Street firms are busy waiting for IPO moves. No prominent U.S. tech companies have filed for an IPO this year, and all eyes are on what Elon Musk will do with SpaceX after he merged the rocket maker with AI startup xAI last week to create a company worth $1.25 trillion.

SpaceX reportedly aims to go public in mid-2026, but Gerber Kawasaki investor CEO Ross Gerber told CNBC that he doesn’t think Musk would take SpaceX public as a standalone entity, and instead would merge it with Tesla.

As for OpenAI and Anthropic (both competing AI labs worth hundreds of billions of dollars), reports have surfaced of final plans for public availability, but no timelines have been set. goldman sachs Analysts said in a recent note that they expect 120 IPOs to raise $160 billion this year, up from 61 last year.

Lise Bayer of Class V Group, which advises pre-IPO companies, doesn’t see much activity in the tech industry. Volatility in public markets, especially software and its AI-related vulnerabilities, geopolitical concerns and weak employment statistics are some of the factors keeping venture-backed startups on the sidelines, he said.

“Right now, it’s not very appetizing,” Bayer said in an interview. “Things are better compared to the past three years, but excessive IPOs are unlikely to be an issue this year.”

This is unwelcome news for venture capitalists, who have been hoping for a return to IPOs since the market closed in 2022 amid soaring inflation and rising interest rates. While some venture firms, hedge funds and strategic investors have made big profits from big acquisitions disguised as acquisitions and license deals, startup investors have historically needed a healthy IPO market to keep limited partners happy and willing to write additional checks.

There were 31 tech IPOs in the U.S. last year, more than the total from three years ago, but far short of the 121 that closed in 2021, according to data compiled by Jay Ritter, a finance professor at the University of Florida who has tracked the IPO market for years.

Alphabet has indicated that, at least for now, the bond market has been very welcoming to its fundraising efforts. Bonds have different maturities, with the first loan coming due after three years. The yield is slightly higher than three-year Treasuries, but this means investors are not being rewarded for the risk.

By selling U.S. bonds, Alphabet set the yield on its 2029 bonds at 3.7% and the yield on its 2031 bonds at 4.1%.

John Lloyd, global head of multisector credit at Janus Henderson Investors, said spreads for investment-grade stocks have historically been tight, making investing difficult.

“I’m not worried about a downgrade, I’m not worried about the fundamentals of the company,” Lloyd said. But Lloyd said he prefers high-yield bonds from so-called neo-clouds and some of the Bitcoin miners currently focused on AI, given the potential for returns.

After raising $20 billion in debt in the U.S., Alphabet quickly sought additional capital of about $11 billion in Europe. One credit analyst told CNBC that Alphabet’s success overseas shows demand extends far beyond Wall Street and could persuade other hyperscalers to follow suit.

With large amounts of debt from a small number of companies, corporate bond indexes face the same problem as equity benchmarks: too much technology.

Today, roughly a third of the S&P 500’s value comes from the tech industry’s trillion-dollar club. Nvidia and hyperscalers. Lloyd said the tech industry currently accounts for about 9% of the investment-grade corporate bond index, and he expects that number to reach the mid-to-high teens.

Dave Harrison-Smith, Bailard’s chief investment officer, described the level of concentration as “an opportunity as well as a risk.”

“These are very profitable cash flow generating businesses, and they have a lot of flexibility to invest that cash flow,” Smith said. His company invests in stocks and bonds. “But what we’re seeing more and more about this issue is that the sheer amount of investment and capital that’s needed is absolutely staggering.”

That’s not the only concern in the bond market.

BondCliQ’s White says with so many bonds on the market from top technology companies, investors will demand higher yields from other companies as well. An increase in supply leads to a fall in bond prices, and as bond prices fall, yields rise.

Alphabet’s sales were reportedly oversubscribed five times, but “if you supply this much paper to the market, eventually demand will wane,” White said.

For borrowers, this means higher costs of capital and a hit to profits. Mr. White said the companies to watch are those that should return to the market in the coming years, when corporate bond rates are likely to be higher.

“We’re going to see a significant increase in corporate debt financing across the board,” White said, pointing to increased costs for companies such as automakers and banks. “This will be a big problem in the future because it means higher debt servicing costs.”

—CNBC’s Seema Mody and Jennifer Elias contributed to this report.

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