AI debt sales reshape global corporate bond markets

Highlights:

• Hyperscalers plough into foreign debt markets as funding needs surge
• Deals set records for euro, sterling, yen, Canadian dollar, Swiss franc markets
• Other US firms looking at issuing abroad - JPMorgan

From Europe to Japan and Switzerland, huge bond issues by Big Tech companies are proving that smaller markets, often overshadowed by the US, can punch above their weight in the $40 trillion world of corporate debt.

Google-parent Alphabet is already one of the biggest outstanding borrowers in the sterling and Swiss franc corporate bond markets, while Amazon raised 14.5 billion euros ($16.88 billion) in March from an eight-part deal, the largest ever in the euro corporate bond market, according to LSEG.

Debt issues by so-called "hyperscalers" - or Big Tech companies - outside the United States are part of a push to diversify their funding early on, bankers said, as they look to finance trillions of dollars of investment in AI infrastructure, especially data centres, in the years ahead.

Raising debt in foreign currencies can also help the companies hedge the currency risk from their global assets, while taking advantage of relatively lower borrowing costs in places like Europe.

Alphabet smashed records across markets, with its yen, Canadian dollar, Swiss franc and sterling deals all setting borrowing records in those currencies.

"If you look at the pace of investment of these companies and if you fast forward 12 months, some of these companies are already going to become among the biggest issuers globally in any currency," said Giulio Baratta, co-head of investment-grade finance at BNP Paribas.

In Europe, Alphabet and Amazon have helped push up borrowing by non-financial US firms to over 60 billion euros ($69.85 billion) this year, another record.

Record debt sales

Morgan Stanley expects around 50 billion euros of total borrowing from the hyperscalers in euro debt this year, which could help lead the US to overtake France as the euro zone's biggest source of overall corporate debt.

"A lot of these markets, including euro, have evolved and now offer a lot more depth and opportunity for larger capital raising than was historically the case," said John Servidea, global co-head of investment grade finance at JPMorgan, which led recent deals for the two hyperscalers.

With the hyperscaler deals, internationally placed non-financial corporate bond sales tracked by LSEG have surged in markets like the Swiss franc and yen this year.

The ability to raise significant amounts of money in such markets has not gone unnoticed by US companies beyond the hyperscalers, Servidea said.

"They're definitely looking at other markets more seriously than they would have previously."

More broadly, borrowing has also surged in currencies like the Australian and Hong Kong dollars as international companies diversify their funding sources.

Investors, meanwhile, have shifted focus to diversifying away from the US dollar given geopolitical tensions and policy uncertainty.

Building exposure to AI

Hyperscalers have seen their non-dollar issuance double to 30% of their total bond funding this year, according to Bank of America.

Raising money abroad also means Big Tech can leave longer periods between tapping the US market, JPMorgan's Servidea said, while borrowing at rates that are in some cases cheaper than the US dollar market, or at least similar.

Heavy borrowing can weigh on a borrower's bonds, and analysts see signs that hyperscalers are underperforming the US corporate bond market. Visiting it less often may help limit the hit.

Baratta at BNP Paribas, which also led deals for Alphabet and Amazon, said these companies were mainly keeping the funds in the currency they are raising rather than swapping them back to dollars.

As for investors, they're keen to build exposure to the AI theme in international bond markets, where technology names previously had a limited presence.

Nicolas Forest, chief investment officer at Candriam, for example, is buying into the euro deals from hyperscalers to build exposure to the tech sector in the European bond market.

By the end of April, Alphabet had already become the fourth-largest borrower in ICE BofA's sterling corporate bond index after just one round of issuance, and the sixth-largest in Swiss francs.

As tech issuance grows, corporate bond markets outside the US will become more exposed to tech sector developments, in good and bad times.

"If there are any problems with (AI), it will probably create more volatility," said David Zahn, head of European fixed income at Franklin Templeton.