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

While the prospect of a SpaceX initial public offering and the hopeful listings from OpenAI and Anthropic have juiced IPO excitement on Wall Street, the current action in tech capital markets has nothing to do with equity. Rather, it’s all about debt.

Tech’s four hyperscalers — Alphabet, Amazon, Meta and Microsoft — are collectively projected to shell out close to $700 billion this year on capital expenditures and finance leases to fuel their artificial intelligence buildouts, responding to what they call historic levels of demand for computing resources.

To finance those investments, industry giants may have to dip into some of the cash they’ve built up in recent years. But they’re also looking to raise mounds of debt, adding to concerns about an AI bubble and fears about a market contagion if cash-burning startups like OpenAI and Anthropic hit a growth wall and pull back on their infrastructure spending.

In a report late last month, UBS estimated that after tech and AI-related debt issuance across the globe more than doubled to $710 billion last year, that number could soar to $990 billion in 2026. Morgan Stanley foresees a $1.5 trillion financing gap for the AI buildout that will likely be filled in large part by credit as companies can no longer self-fund their capex.

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

The biggest corporate debt sales this year have come from Oracle and Alphabet.

Oracle said in early February that it planned to raise $45 billion to $50 billion this year to build additional AI capacity. It quickly sold $25 billion of dollars worth of debt in the high-grade market. Alphabet followed this week, upping the size of a bond offering to over $30 billion, after holding a prior $25 billion debt sale in November.

Other companies are letting investors know that they could come knocking.

Amazon filed a mixed shelf registration last week, disclosing that it may seek to raise a combination of debt and equity. On Meta’s earnings call, CFO Susan Li said the company will look for opportunities to supplement its cash flow “with prudent amounts of cost-efficient external financing, which may lead us to eventually maintain a positive net debt balance.”

And as Tesla bolsters its infrastructure, the electric vehicle maker may look to outside funding, “whether it’s through more debt or other means,” CFO Vaibhav Taneja said following fourth-quarter earnings.

With some of the world’s most valuable companies adding to their debt loads by the tens of billions, Wall Street firms are plenty busy as they await movement on the IPO front. There haven’t been any IPO filings from notable U.S. tech companies this year, and the attention is focused on what Elon Musk will do with SpaceX after he merged the rocket maker with AI startup xAI last week, forming a company that he says is worth $1.25 trillion.

Reports have 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, and will instead merge it with Tesla.

As for OpenAI and Anthropic — competing AI labs that are both valued in the hundreds of billions of dollars — reports have surfaced about 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, isn’t seeing bustling activity within tech. The volatility in the public markets, particularly around software and its AI-related vulnerabilities, along with geopolitical concerns and soft employment numbers are some of the factors keeping venture-backed startups on the sidelines, she said.

“It’s not that appetizing out there right now,” Buyer said in an interview. “Things are better than they’ve been the last three years, but an overabundance of IPOs is unlikely to be a problem this year.”

That’s unwelcome news for venture capitalists, who have been waiting for an IPO resurgence since the market shut down in 2022 as inflation soared and interest rates rose. Certain venture firms, hedge funds and strategic investors have generated handsome profits from large acquisitions, including those disguised as acquihires 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 U.S. last year, more than the three years prior combined, though far below the 121 deals completed in 2021, according to data compiled by University of Florida finance professor Jay Ritter, who has long tracked the IPO market.

Alphabet has shown that the debt market is extremely receptive to its fundraising efforts, for now at least. The bonds have varying maturity dates, with the first debt coming due in three years. Yields are narrowly higher than for the 3-year Treasury, meaning investors aren’t getting rewarded for risk.

In its U.S. bond sale, Alphabet priced its 2029 notes at a 3.7% yield and its 2031 notes at 4.1%.

John Lloyd, global head of multi-sector credit at Janus Henderson Investors, said spreads are historically tight across the investment grade landscape, which makes it a tough investment.

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

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

With so much debt coming from a small number of companies, corporate bond indexes are faced with a similar issue as stock benchmarks: too much tech.

Roughly 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 tech 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 tremendously profitable cash flow generative businesses that have a great deal of flexibility to invest that cash flow,” said Smith, whose firm invests in equities and fixed income. “But the way we’re looking at it increasingly is the sheer amount of investment and capital that is being required is quite simply eye-popping.”

That’s not the only concern for the debt market.

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

Alphabet’s sale was reportedly five times oversubscribed, but “if you supply this much paper into the marketplace, eventually demand is going to wane,” White said.

For borrowers, that means a higher cost of capital, which results in a hit to profits. The companies to look out for, White said, are those that have to come back to the market in the next couple years, when interest rates for 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 like automakers and banks. “That’s a big problem down the line because it means higher debt servicing costs.”

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

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