Credit heavyweights like DoubleLine Capital LP and Oaktree Capital Management are buying debt now that can perform well if the artificial intelligence boom turns into a credit bust.
While prices and valuations on bonds aren’t yet frothy, the market will undoubtedly reach those levels in the coming months or years as technology companies pour trillions of dollars into AI, said Robert Cohen, portfolio manager at DoubleLine.
Investing in debt tied to AI is difficult because many of the securities for sale now will not mature for decades, when current technology may be obsolete. Data centers face a heightened risk of overbuilding because the properties take a long time to construct and many projects are launching at once, Cohen said.
“You have to think about what credit will survive a deep cycle,” Cohen said, speaking at the Bloomberg Global Credit Forum on Wednesday. “You want credits that either through structure or just a very strong balance sheet will survive.”
At the same time, companies are flooding the market with so much debt that money managers cannot afford to ignore them. The big US tech firms known as hyperscalers have sold more than $155 billion of unsecured bonds globally, already up more than 45% from their entire issuance last year, according to a May 21 report by Barclays.
And there’s additional debt beyond hyperscaler notes. This week alone, Hut 8 Corp., a data center company, sold around $4 billion of high-grade bonds to fund a project in Texas, while a $36 billion bond sale to purchase chips for Anthropic, an AI model developer, is moving closer to completion.
Plenty more borrowing is coming. Bloomberg Intelligence estimates that companies will spend around $5 trillion on capital expenditure for AI over the next five years, much of which will come from debt.
Oaktree invests as if there could potentially be speculative excess in the future, even if it doesn’t know whether there will be. The market is in the early stages of data center financing, said Christina Lee, co-portfolio manager in private credit at Oaktree.
“We need to be selective because we really don’t know yet who the winners and losers of this competitive set will be,” Lee said. “Data center financing is a really large and growing opportunity set. We’re just in the early innings of it.”
In a note in December, Oaktree co-founder Howard Marks said investors have to buy the debt carefully.
“I’d advise that no one should go all-in without acknowledging that they face the risk of ruin if things go badly,” Marks wrote. “But by the same token, no one should stay all-out and risk missing out on one of the great technological steps forward.”
Losses on the debt that goes bad could be higher than investors are used to, said Dan Ivascyn, group chief investment officer at Pacific Investment Management Co., in a video in late May. With so much debt coming, there will likely be chances to secure good investments, and Pimco is hoping to leverage its size to capture those compelling opportunities.
“It’s not a sector where we want to be overweight just given the uncertainty, the volatility, the need to predict how companies are going to make money in this space,” Ivascyn said, adding, “But because of the massive funding needs, you can be defensive in terms of overall exposure and unlock tremendous value.”
Historically, big tech revolutions have produced speculative excess, Ray Dalio, founder of hedge fund Bridgewater Associates, said on Bloomberg Television this week.
“Nobody can get it exactly right. You have to either spend a ton of money to capture your market share and don’t worry about whether it’s too much or not, or you don’t spend enough money and you lose your market share.”
DoubleLine’s Cohen defines a credit bubble as when investors provide debt financing to companies which need real growth just to service their obligations. Historically, technological booms have tended to result in this kind of froth.
“What’s the probability that we will be in an AI bubble? I’ll put maybe 100% on that,” Cohen said.
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