Apollo Global Management's chief economist, Torsten Slok, highlighted that the cost of credit default swaps (CDS) for bonds issued by hyperscalers is rising, reflecting a deterioration in their credit fundamentals rather than increased hedging by banks.
The widening gap between hyperscaler CDS and bank CDS, which has expanded to around 60 basis points, suggests that the market is independently assessing higher credit risk for these companies. This warning comes in the context of recent calls from leaders in the AI sector to slow advancements due to safety concerns, which could impact the financial outlook for cloud providers.
While some analysts believe that improving margins justify the debt levels of these companies, others, like Dean Baker from the Center for Economic and Policy Research, note that sophisticated investors are signaling substantial risk in the ability of AI companies to meet their financial commitments.
Current debt-to-equity ratios and negative free cash flows for companies like Alphabet, Amazon, and Meta further underscore the financial pressures they face, raising questions about their future stability in a rapidly evolving market