Credit spreads for technology firms engaged in artificial intelligence are widening, indicating that investors perceive a higher risk of default and are demanding greater yields on corporate debt. This trend is particularly concerning for neoclouds, which are tech infrastructure builders with significant debt levels.
For instance, CoreWeave has a staggering debt-to-equity ratio of 739, while Nebius and Applied Digital also show high ratios of 131 and 172, respectively. In contrast, larger cloud companies like Alphabet, Amazon, and Microsoft maintain much lower debt-to-equity ratios of 18, 51, and 30, respectively.
Analysts from Mizuho have raised alarms about the potential for negative cash flow among neoclouds, which could exacerbate the widening spreads. Apollo Global Management's chief economist, Torsten Slok, noted that credit default swaps for Oracle are at levels not seen since 2008, highlighting growing concerns over credit quality.
As corporate credit spreads are expected to widen further into 2027, UBS's Matthew Mish cautioned that credit returns may not justify the risks involved. The tech sector's reliance on non-traditional financing methods and circular investments could either mitigate or worsen the impact of rising debt costs.
The Bank for International Settlements warned that excessive debt and circular financing could lead to a financial bust, as overinvestment in the sector is estimated at 1.5 times what is necessary. This precarious situation raises concerns about the credit quality of competing firms, as highlighted by Dan Alpert of Westwood Capital