Tech Giants Pile on Debt to Fuel AI Arms Race, Testing Investor Faith

The world's largest technology companies are making a historic financial pivot. To fund an unprecedented surge in artificial intelligence infrastructure, firms like Amazon, Meta, and Alphabet are turning aggressively to debt markets, a move that is unsettling long-held investor assumptions. According to UBS, aggregated capital expenditure for AI hyperscalers could reach $770 billion in 2026, 23% above prior forecasts. To cover this, analysts project these companies will borrow an additional $40 to $50 billion this year alone.

For years, a tacit understanding existed between these tech behemoths and their creditors: the speculative, high-stakes spending on AI would be financed internally through massive cash flows, keeping debt markets separate. That understanding is now being rewritten. "We've been told this AI spend was equity risk, not a credit concern," said Al Cattermole, a fixed income portfolio manager at Mirabaud Asset Management. "By bringing this capex into the debt markets, you immediately introduce the question of creditworthiness.

" Recent months have seen a borrowing spree, including a landmark $20 billion debt issuance by Alphabet that featured a rare 100-year sterling bond. This rapid accumulation of debt is shifting how these companies, long seen as "cash-plus" entities, are evaluated. BlackRock notes the market's focus has sharpened: it now demands a clear path from AI investment to revenue and profit. The worry, as voiced by several analysts, is twofold.

First, the scale of spending is staggering. Alphabet's planned capex for next year nears 50% of its revenue, a level Cattermole calls "unheard-of" for any typical corporation. Second, the very assets being built—vast data centers—face the risk of rapid obsolescence. "What if, in three years, these Nvidia chips are outstripped by a competitor, and my data center is obsolete?

" Cattermole asked, highlighting the long-term risk for lenders. While companies like Oracle have already seen volatility in their credit insurance instruments, analysts acknowledge the hyperscalers' underlying strengths. They possess robust balance sheets and dominant market positions. Yet the new reliance on leverage introduces unknown variables, including increased off-balance-sheet activity.

As Vanguard senior economist Shaan Raithatha cautioned, hidden risks may be building in the system. For investors, the era of blank-check funding for AI is over; the bill has now arrived, and its terms are being scrutinized like never before.

Source: CNBC