Hyperscalers are dramatically increasing AI capex spending and increasingly using debt markets to fund it
This spending is projected to reach $770 billion by 2026, with debt issuance reaching $230-240 billion this year
The shift toward debt financing is breaking an 'unspoken contract' with investors who expected AI spending to be equity-funded
Experts warn of potential risks including obsolete infrastructure and hidden leverage activities
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Hyperscalers including Amazon, Meta, Google-owner Alphabet, and Oracle are dramatically increasing their AI capital expenditure spending and increasingly turning to credit markets to fund these investments, challenging their 'fortress balance sheet' status and breaking what investors call an 'unspoken contract' that kept speculative AI spending separate from debt markets, with UBS projecting aggregated capex among these tech giants could top $770 billion in 2026, some 23% higher than previously expected, as recent bond issuances by Oracle ($18 billion) and Alphabet ($20 billion) signal a significant shift in funding strategy. UBS credit strategists reported in a February 18 note that these increased capex plans imply a $40 billion to $50 billion ramp-up in borrowing from hyperscalers, pushing public market debt issuance to between $230 to $240 billion this year. This represents a significant departure from previous funding approaches, where AI investments were primarily expected to be funded through generated cash flow rather than debt. Al Cattermole, fixed income portfolio manager at Mirabaud Asset Management, emphasized that this shift is dramatically changing the dynamic between hyperscalers and investors, who had been reassured that AI spending would be equity-funded rather than debt-financed. The move toward debt financing has raised concerns about the sector's creditworthiness and the sustainability of this spending trajectory. Oracle's share price has trended lower over the past six months, while credit default swaps on its bonds have shown sharp volatility. BlackRock noted that mega-cap tech companies are using the current credit issuance 'bonanza' to bridge the gap between current investment and future revenues, warning that rising corporate borrowing adds supply to bond markets already struggling with large public deficits. Cattermole pointed to Alphabet's planned capex of almost 50% of its revenue for next year, calling it an 'unheard-of level' that signals 'a break point in natural cycles,' while Shaan Raithatha, senior economist at Vanguard, warned that while hyperscalers start from a strong position, they are now taking on more leverage with potential hidden risks including the possibility that rapid technical improvements could render expensive data centers obsolete before they're fully depreciated.
Financial market where participants can issue new debt or buy and sell debt securities
The bond market (also debt market or credit market) is a financial market in which participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, but it may include notes, bills, and so on for public...
Debt is an obligation that requires one party, the debtor, to pay money borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Commercial debt is generally subject to contractual terms regarding ...
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Deep Analysis
Why It Matters
This shift matters because it challenges the perceived financial stability of mega-cap tech companies, which have long been viewed as having fortress balance sheets. Investors are now concerned that funding speculative AI investments through debt rather than cash flow introduces new credit risks and could destabilize the bond market.
Context & Background
Hyperscalers like Amazon, Meta, and Alphabet are significantly increasing AI capital expenditure
UBS data projects aggregated AI capex could reach $770 billion in 2026
Companies are shifting from cash-funded AI spending to debt-funded spending
Recent large debt issuances include Oracle's $18 billion and Alphabet's $20 billion bonds
Credit default swaps and bond volatility indicate growing investor concern
What Happens Next
Investors will likely increase scrutiny of how AI investments translate into actual revenue and profits, leading to more active investment strategies. There may be increased volatility in tech company bonds as markets assess the risks of potential AI obsolescence and debt sustainability.
Frequently Asked Questions
What is the unspoken contract mentioned in the article?
The unspoken contract was that AI spending would be funded by generated cash flow, keeping it separate from debt markets and protecting creditworthiness.
Why are investors concerned about tech companies using debt for AI capex?
Investors worry that adding significant debt challenges the companies' credit ratings and exposes lenders to risks if AI investments fail to generate expected returns.
What are the hidden risks associated with AI debt spending?
Hidden risks include potential obsolescence of AI infrastructure, off-balance sheet activities, and the possibility that current data centers could become inefficient due to rapid technological advances.
Original Source
In this article ORCL AMZN META GOOGL Follow your favorite stocks CREATE FREE ACCOUNT Hyperscalers are significantly ramping up their AI capex spending — and increasingly using credit markets to fund it. But investors say this shift is challenging mega-cap tech giants' so-called 'fortress balance sheet' status, and rips up what they call the "unspoken contract" that kept speculative AI spending largely separate from debt markets. After Amazon , Meta and Google-owner Alphabet all unveiled sizable increases in their full-year capex spending plans during earnings season, UBS data indicates that aggregated capex spend among AI hyperscalers could top $770 billion in 2026 — some 23% higher than previously expected. In a Feb. 18 note, UBS credit strategists said such increases imply a $40 billion to $50 billion ramp-up in borrowing from hyperscalers, pushing public market debt issuance to between $230 to $240 billion this year. Oracle. Al Cattermole, fixed income portfolio manager at Mirabaud Asset Management, said this tilt toward the bond market is dramatically shifting the dynamic between hyperscalers and investors. "For years, we've been told this AI spend would be funded by generated cash flow — that it is equity risk, it is speculative, and not to worry about it from a credit point of view," Cattermole told CNBC in an interview. "There now seems to be a change in the unspoken contract that while we would continue to lend to these businesses, really AI capex was still going to be equity or cash funded….By bringing capex spend into the debt markets, you now have the question of credit worthiness." 'Break point' Last September, Oracle tapped the bond market for some $18 billion in one of the biggest debt issuances on record. Others have rapidly followed, with Google-owner Alphabet recently issuing some $20 billion in debt, including a rare 100-year sterling-denominated bond. That's placing the sector's debt load under sharper scrutiny. "Everyone had been treating these A...
