(Bloomberg) — As a flood of debt sales by US tech companies ripples through the credit market, it seems to be triggering an inadvertent rise in risk metrics for some of the world’s safest firms.
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Strategists at BNP Paribas SA say these moves are a knock-on effect of intensifying competition for cash in the top end of the market. With Big Tech on a multi-billion dollar borrowing spree, this competition is pushing up the cost of credit default swaps even for companies that have nothing to do with data centers or artificial intelligence.
BNP didn’t disclose the individual companies it used in its analysis, yet swap spreads in the likes of luxury giant LVMH, drugmaker Sanofi and defense firm BAE Systems Plc have climbed by more than 10% since the end of last year, based on data compiled by Bloomberg.
“All high-quality credit competes with hyperscalers for capital,” said Josh Farber, head of European credit strategy at BNP Paribas. There may eventually be consequences for sovereign debt as well, he added.
In Farber’s analysis, which focused on the iTraxx Europe index of high-grade corporate CDS, the scramble for investor cash may be causing a “super trend” to emerge, where spreads converge toward the index average. They recommended a two-pronged trade to clients, involving buying a tight-spread basket while selling protection on the index.
The trend isn’t immediately obvious when looking at risk premiums on CDS indexes, which are near their tightest levels in almost 20 years. That’s partly because of crowding in the market for weaker credits, which has pushed their cost of protection lower.
But at the top end of the corporate bond market, competition for investor attention is fierce. Firms like Meta Platforms Inc., Alphabet Inc. and Amazon.com Inc. have raised hundreds of billions in dollars and other currencies this year to fund their AI ambitions. Out of the hyperscaler group, only Oracle Corp has ratings that are lower than double-A.
CDS indexes protect a basket of names and trade independently to the underlying single-borrower contracts. They are among the most liquid instruments in the credit market, with tens of billions of dollars’ worth of swaps changing hands each day in order to hedge or take directional views.
Convergence toward the index average may mean that these key measures of risk have less of a buffer when markets turn sour.
Top Borrowers Overnight
While BNP focused on the European CDS index, Faber said that intense competition for capital is a global phenomenon. Hyperscalers trying to rapidly scale in AI have reached far and wide for capital, becoming some of the top borrowers in markets like the UK, Japan and Switzerland virtually overnight.
For some, the jump in debt supply from Big Tech firms and the knock-on effect on spreads may be what’s needed to shake the credit market off its currently tranquil state.
“This can be a real wake-up call for credit compared to what we’ve seen in the last few years. It’s unsustainable for the market to keep getting tighter and nothing moving much,” said Andrea Seminara, chief executive officer at Redhedge Asset Management.
Spreads on investment-grade corporate bonds globally are currently indicated at about 80 basis points, only about six basis points from the post-financial crisis low they hit earlier this year, based on Bloomberg indexes.
The risk premium in corporate bonds and the cost of protection against default in those same bonds are typically interlinked and move in the same direction, although the magnitude of those moves can differ on occasion. When the competition of capital drives costs higher even for safe companies across the world, their CDS spreads are bound to follow.
“If you have American companies printing wider, this will potentially reprice the investment-grade market overall,” Seminara said.
To be sure, bankers selling new hyperscaler bonds to investors are taking steps to ensure they perform well once they hit the open market, for example by avoiding fast-money buyers, like hedge funds.
Still, further supply from tech companies, whether later this year or next, is widely expected among Wall Street analysts, potentially putting further pressure on their bonds, related CDS, and the overall market.
“It more broadly starts to raise the question of how should investors be looking at these tighter names?” said BNP’s Farber. “It has woken up the market that you’re not really getting paid very much for the risk.”
–With assistance from Selina Chen.
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