(Bloomberg) — Credit heavyweights like DoubleLine Capital LP and Oaktree Capital Management are now buying debt that could perform well if the AI boom turns into a credit boom.
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While bond prices and valuations are not yet frothy, the market will undoubtedly reach those levels in the coming months or years as technology companies pour trillions of dollars into artificial intelligence, said DoubleLine portfolio manager Robert Cohen.
Investing in AI-related debt is difficult because many of the securities currently for sale will not mature for decades when the current technology may become obsolete. Data centers face the risk of overbuilding because properties take a long time to build and many projects are launched at the same time, Cohen said.
“You have to think about which credit will survive a deep cycle,” Cohen said at the Bloomberg Global Credit Forum on Wednesday. “You want loans that can survive through structure or just a very strong balance sheet.”
At the same time, companies are flooding the market with so much debt that money managers can’t ignore them. According to a May 21 report from Barclays, major U.S. tech firms, known as hyperscalers, sold more than $155 billion in unsecured bonds globally; this figure is already up more than 45% compared to all of its issuances last year.
And there is additional debt beyond the hyperscaler notes. This week alone, Hut 8 Corp., a data center company, sold nearly $4 billion in high-grade bonds to finance a project in Texas, while a $36 billion bond sale to buy chips for artificial intelligence model developer Anthropic is nearing completion.
A lot more borrowing is coming. Bloomberg Intelligence estimates that companies will spend about $5 trillion on capital expenditures for AI over the next five years, with most of that coming from debt.
Oaktree is investing as if there was a possibility of a speculative glut in the future, even though it doesn’t know whether there will be one. Christina Lee, private credit associate portfolio manager at Oaktree, said the market is in the early stages of data center financing.
“We need to be selective because we don’t know yet who the winners and losers of this competition will be,” Lee said. “Data center finance is a really big and growing opportunity set. We’re just in the early stages of it.”
Investors should buy debt with caution, Oaktree co-founder Howard Marks said in a December note.
“I would advise that no one should do anything without accepting that they run the risk of ruin if things go badly,” Marks wrote. “But equally, no one should be left out completely and risk missing out on one of the big technological steps forward.”
Dan Ivascyn, group chief investment officer of Pacific Investment Management Co., said in a video released at the end of May that losses on bad loans could be higher than investors are accustomed to. With so much debt coming in, there will also be a chance to secure good investments, and Pimco hopes to leverage its size to capture these compelling opportunities.
“Given the uncertainty, volatility and need to predict how companies will make money in this space, it’s not a sector we want to be overweight,” Ivascyn said. “But because of the large financing needs, you can be defensive in terms of overall visibility and unlock tremendous value.”
Ray Dalio, founder of hedge fund Bridgewater Associates, said on Bloomberg Television this week that historically major technology revolutions have produced speculative excess.
“No one gets it quite right. Either you have to spend a ton of money to capture your market share and not worry about whether it’s too much or not, or you don’t spend enough money and you lose your market share.”
DoubleLine’s Cohen defines a credit bubble as investors providing debt financing to companies that need real growth just to meet their obligations. Historically, technological advances have tended to result in such foams.
“What are the odds that we’re in an AI bubble? I would maybe have 100% confidence in that,” Cohen said.
Click here for Goldman Sachs’ podcast on how strong demand from pension and insurance companies will support corporate debt through macroeconomic volatility and record supply.
Week Review
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Apollo and Blackstone have finalized a $35 billion financing package for Anthropic to expand its AI infrastructure, marking the latest mega-deal in the AI race.
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Bond sale of an Nvidia-related data center project attracts $17 billion in investor orders; which was four times the size of the bid; This has highlighted the relentless appetite for debt tied to the development of AI infrastructure.
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A data center affiliated with CoreWeave will receive funding from Elk Grove Village Property’s $850 million junk bond sale.
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Private loan fund repayments are rising again after appearing to decline. Investors in Cliffwater’s flagship fund sought to buy back about 17% of their shares, forcing the fund to impose an industry-wide standard cap of 5%. Meanwhile, Blackstone capped redemptions from its flagship private credit fund for the first time after investors tried to withdraw 10% of the shares.
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Borrowers are flocking to Europe’s leveraged loan market to reprice their debt as they seek to take advantage of favorable credit terms to reduce financing costs.
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Led by UBS, banks have been looking for ways to pay off the more than $700 million in debt they’ve been holding on their balance sheets for months after financing Echo Global Logistics’ acquisition of ITS Logistics with their own cash.
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QXO Building Products has seen improved terms on a $6 billion financing package to acquire rival TopBuild, which has attracted three times as much demand from investors.
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UBS is preparing to raise additional Tier 1 capital in US dollars, its first foray into the market since Switzerland paused plans to tighten rules on its riskiest bank debt.
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Luxury retailer Saks Global Enterprises has received court permission to emerge from bankruptcy after closing discount businesses and unprofitable stores to focus on selling the luxury products for which it has long been known.
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Rising memory costs are pushing GoPro to the brink. The action camera maker has warned of risks to its ability to continue operating and is seeking financing to avoid default.
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Manchester United is considering tapping the private placement market to refinance $425 million in debt due next year.
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Merlin Entertainments, a theme park operator, is facing pressure on its debt, with some of its bonds approaching levels typically indicative of distress, as it tries to refinance junk bonds worth more than $800 million.
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Venezuela hired Hogan Lovells USA as legal counsel; This is an important step in starting what is expected to be one of the largest public debt restructurings in decades.
In motion
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Dominic Goh and William Wallace have been appointed co-heads of fund financing solutions at SMBC. They will report to Juan Kreutz, the bank’s head of structured finance solutions.
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Forza Investment Group has brought back Brendan Hall, a former research analyst at the firm, as an executive. Hall will focus on special situations and credit opportunities in the public and private markets. He most recently worked at Jain Global.
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NatWest Group has appointed London-based Scott Roose as interim head of its core capital markets business. He worked at Credit Suisse before joining NatWest in 2023 as head of US capital markets. Roose replaces James Tayler, who has been appointed head of the major corporate and financial institutions group at NatWest.
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Armin Peter, an experienced debt capital markets banker with more than 17 years at UBS, has been appointed general manager of markets at Dubai Financial Services Authority. During his time at UBS, Peter held a number of senior roles, including head of global debt syndicate and head of sustainable banking for EMEA.
–With help from Hannah Webster and Nabila Ahmed.
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