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

While the prospect of SpaceX going public and hopeful listings from… OpenAI and Anthropic After sparking IPO excitement on Wall Street, the current action in tech capital markets has little to do with stocks. Instead, it’s all about debt.

The technology’s four hyperscalers — alphabet, Amazon, dead and Microsoft – They are collectively expected to be bombed nearby 700 billion dollars This year on capital expenditures and financing leases to fuel AI build operations, in response to what they call historic levels of demand for computing resources.

To finance those investments, industry giants may have to use some of the money they have accumulated in recent years. But they are also looking to raise large amounts of debt, raising concerns about an AI bubble and concerns about market contagion if cash-burning startups like OpenAI and Anthropic hit a growth wall and pull back on their infrastructure spending.

In a report late last month, UBS estimated that after technology and AI-related debt issuance worldwide doubled to $710 billion last year, that number could rise to $990 billion in 2026. Morgan Stanley It expects $1.5 trillion Financing gap To build AI that will likely be largely funded by credit as companies can no longer self-finance their capital expenditures.

Chris White, chief executive of data and research firm BondCliQ, says the corporate debt market has seen a “massive” increase in volume, amounting to “massive supply now in debt markets”.

The largest sales of corporate debt this year came from… oracle And the alphabet.

oracle He said In early February, it planned to raise between $45 billion to $50 billion this year to build additional AI capacity. It quickly sold $25 billion worth of debt into the high-quality market. Alphabet tracking this week, Escalation The bond offering amounts to more than $30 billion, following a previous $25 billion debt sale in November.

Other companies let investors know they may be knocking on the door.

Amazon Provide a mixed rack registration Last week, it revealed it may seek to raise a mix of debt and equity. on dead Earnings callChief Financial Officer Suzanne Lee said the company will look for opportunities to supplement its cash flow “with prudent amounts of cost-effective external financing, which may ultimately lead us to maintain a positive net debt balance.”

And as Tesla After it strengthens its infrastructure, the electric car maker may look to external financing, “be it through more debt or other means,” said Vaibhav Taneja, chief financial officer. Fourth quarter earnings.

With some of the world’s most valuable companies adding to their debt loads in the tens of billions, Wall Street firms are very busy as they wait for action on the IPO front. There have been no IPO filings from prominent US technology companies this year, and the attention is on what Elon Musk Will do with SpaceX next Merged The rocket maker and artificial intelligence startup xAI last week founded a company he says is worth $1.25 trillion.

Reports SpaceX has suggested it aims to go public in mid-2026, while investor Ross Gerber, CEO of Gerber Kawasaki, told CNBC he doesn’t think Musk will take SpaceX public as a standalone entity, and instead merge it with Tesla.

As for OpenAI and Anthropic — competing AI labs worth hundreds of billions of dollars — reports have emerged about eventual plans for a public debut, but no timelines have been set. Goldman Sachs Analysts said in a recent note that they expect 120 IPOs this year, raising $160 billion, up from 61 deals last year.

Class V Group’s Lise Buyer, who advises pre-IPO companies, doesn’t see noisy activity in the technology space. Volatility in the general markets, especially around Software and AI-related vulnerabilities, Besides geopolitical concerns and soft employment numbers, these are some of the factors keeping venture-backed startups on the sidelines, she said.

“It’s not very appetizing right now,” the buyer said in an interview. “Things are better than they have been in the last three years, but the glut of IPOs is unlikely to be a problem this year.”

This is unwelcome news for venture capitalists, who have been waiting for an IPO return since the market closed in 2022 with rising inflation and rising interest rates. Some investment firms, hedge funds, and strategic investors have made good profits from large acquisitions, including those in disguise. acquires and licensing deals, but investors in startups historically need a healthy market for IPOs to keep their limited partners happy and willing to write additional checks.

There were 31 technology IPOs in the U.S. last year, more than the previous three years combined, though far fewer than the 121 deals completed in 2021, according to Data It was compiled by University of Florida finance professor Jay Ritter, who has long followed the IPO market.

Alphabet has shown that the debt market is very receptive to fundraising efforts, at least for now. The bonds have different maturity dates, with the first debt due within three years. Yields are slightly higher than 3-year Treasury yields, meaning investors are not rewarded for risk.

In it Selling US bondsAlphabet has priced its 2029 notes to yield 3.7% and its 2031 notes to yield 4.1%.

Spreads are historically tight across the investment grade landscape, making it a difficult investment, said John Lloyd, global head of multi-sector credit at Janus Henderson Investors.

“We’re not worried about ratings downgrades, we’re not worried about corporate fundamentals,” Lloyd said. But when looking at the potential for returns, Lloyd said he prefers higher-yielding debt from some of the so-called new clouds and mutual funds. Converted bitcoin miners Which is now focused on artificial intelligence.

After raising $20 billion in debt in the United States, Alphabet immediately turned to Europe for nearly $11 billion in additional capital. Alphabet’s success overseas could convince other large-cap companies to follow suit, as it shows demand is going beyond Wall Street, a credit analyst told CNBC.

Nearly a third of the S&P 500’s value now comes from the trillion-dollar tech club, which includes… Nvidia And hyperscalers. Technology now represents about 9% of investment-grade corporate debt indexes, Lloyd said, and he sees that number reaching moderate to high.

Dave Harrison Smith, Billard’s chief investment officer, called this level of focus “both an opportunity and a risk.”

“These are companies that generate very profitable cash flow and have a lot of flexibility to invest that cash flow,” said Smith, whose firm invests in stocks and fixed income. “But the way we increasingly look at it is that the sheer amount of investment and capital required is simply astounding.”

This is not the only concern for the debt market.

With such a massive supply of debt hitting the market from big tech companies, investors will demand stronger returns from all, says BondCliQ’s White. Increased supply causes bond prices to fall, and when bond prices fall, yields rise.

Alphabet’s sales exceeded demand five times, but “if you feed the market that much paper, eventually demand will diminish,” White said.

For borrowers, this means a higher cost of capital, resulting in lower profits. The companies to look out for are those that have to return to the market in the next two years, when interest rates on corporate bonds are likely to be higher, White said.

“This will significantly increase corporate debt financing across the board,” White said, identifying increased costs for companies such as automakers and banks. “This is a big problem in the future because it means higher debt servicing costs.”

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

He watches: Alphabet intends to raise more than $30 billion from the sale of bonds