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

While the prospect of a SpaceX initial public offering and the hopeful listings of OpenAI and Anthropic fueled IPO excitement on Wall Street, the current action in tech capital markets has nothing to do with stocks. Rather, it is about debt.

Tech’s four hyperscalers — Alphabet, amazon, Goal and Microsoft — are collectively projected to track up close to $700 billion This year on capital expenditures and leases to fuel their artificial intelligence builds, in response to what they call historic levels of demand for computing resources.

To finance these investments, giants in the industry may have to dip into some of the cash they have built up in recent years. But they’re also chasing piles of debt, adding to concerns about an AI bubble and fears of market contagion if cash-burning companies like OpenAI and Anthropic hit a growth wall and scale back their infrastructure spending.

In a report late last month, UBS estimated that after technology and AI-related debt issuance worldwide more than doubled to $710 billion last year, that number could rise to $990 billion in 2026. Morgan Stanley provide $1.5 trillion funding gap for the AI ​​expansion which will probably be largely filled by credit, since companies can no longer finance their capital themselves.

Chris White, chief executive of data and research firm BondCliQ, says the corporate debt market has experienced a “monumental” increase in size, which translates to “massive supply now in the debt markets.”

The biggest selloff of corporate debt this year has come Oracle and Alphabet.

Oracle said In early February, it planned to raise $45 billion to $50 billion this year to build additional AI capacity. It quickly sold $25 billion of debt in the high-grade market. Alphabet followed this week, build up the size of a bond offering to more than $30 billion, after a previous debt sale of $25 billion was held in November.

Other companies let investors know they can come knocking.

amazon filed a mixed shelf registration last week, revealed that it may be seeking to raise a combination of debt and equity. On Objectives earnings callChief Financial Officer Susan Li said the company will seek opportunities to supplement its cash flow “with prudent amounts of cost-effective external financing, which can lead us to ultimately maintain a positive net debt balance.”

And so tesla bolsters its infrastructure, the electric vehicle maker could look to outside financing, “whether it’s through more debt or other means,” said CFO Vaibhav Taneja. fourth quarter earnings.

With some of the world’s most valuable companies adding tens of billions to their debt loads, Wall Street firms are very busy as they await movement on the IPO front. There have been no IPO filings from notable US tech companies this year, and attention has been focused on what Elon Musk will do with SpaceX after he fused together the rocket maker with AI startup xAI last week, which has founded a company it says is worth $1.25 trillion.

Reports has suggested SpaceX will aim 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, preferring to merge it with Tesla.

As for OpenAI and Anthropic — rival AI labs both valued in the hundreds of billions of dollars — reports have surfaced of eventual plans for public debuts, 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 busy activity within technology. The volatility in the public markets, especially around software and its AI-related vulnerabilities, Along with geopolitical concerns and soft employment numbers are some of the factors keeping venture-backed companies on the sidelines, she said.

“It’s not that nice out there right now,” Buyer said in an interview. “Things are better than they have been in the last three years, but a 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 revival since the market closed in 2022 as inflation soared and interest rates rose. Certain venture companies, hedge funds and strategic investors have generated handsome profits from large acquisitions, including those disguised as obtain and licensing deals, but startup investors historically need a healthy IPO market to keep their limited partners happy and willing to write additional checks.

There were 31 tech IPOs in the US last year, more than the three years before that combined, though well below the 121 deals completed in 2021, according to data compiled by University of Florida finance professor Jay Ritter, who has long watched the IPO market.

Alphabet has shown that the debt market is extremely receptive to its fundraising efforts, at least for now. The bonds have different maturities, with the first debt due in three years. Yields are just higher than for the 3-year Treasury, meaning investors are not rewarded for risk.

In his US bond saleAlphabet priced its 2029 notes at a yield of 3.7% and its 2031 notes at 4.1%.

John Lloyd, global head of multisector credit at Janus Henderson Investors, said spreads have historically been tight across the investment grade landscape, making it a difficult investment.

“We’re not worried about ratings downgrades, not worried about the fundamentals of the companies,” Lloyd said. But looking at yield potential, Lloyd said he preferred higher-yielding debt from some of the so-called neoclouds and the converted bitcoin miners which is now focused on AI.

After raising $20 billion in debt in the US, Alphabet immediately turned to Europe for about $11 billion in additional capital. A credit analyst told CNBC that Alphabet’s success overseas could convince other hyperscalers to follow, as it shows that demand goes well beyond Wall Street.

About one-third of the S&P 500’s value now comes from tech’s trillion-dollar club, which includes Nvidia and the hyperscalers. Lloyd said technology is now about 9% of investment-grade corporate debt indexes, and he sees that number reaching the mid- to high-teens.

Dave Harrison Smith, chief investment officer at Bailard, described that level of concentration as an “opportunity and a risk”.

“These are hugely profitable cash flow-generating businesses that have a lot of flexibility to invest that cash flow,” said Smith, whose firm invests in equities and fixed income. “But the way we’re increasingly looking at it, the sheer amount of investment and capital required is simply striking.”

This is not the only concern for the debt market.

BondCliQ’s White says that with such a large supply of debt hitting the market from the top tech companies, investors are going to demand stronger yields from all of them. Increased supply leads to lower bond prices, and when bond prices fall, yields rise.

Alphabet’s sale was reportedly oversubscribed five times, but “if you supply that much paper in the market, eventually the demand is going to taper off,” White said.

For lenders, this means a higher cost of capital, resulting in a hit to profits. The companies to watch for, White said, are those that should return to the market in the next few years, when interest rates on corporate bonds are likely to be higher.

“It will cause much, much higher corporate debt financing across the board,” White said, specifying increased costs for companies such as automakers and banks. “This is a big problem in the future because it means higher debt service costs.”

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

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