Credit spreads for tech companies driving the AI buildout are widening and are expected to expand even more later this year as debt levels increase. That could put stress on the heavily indebted tech infrastructure builders known as neoclouds, as well as the larger cloud computing hyperscalers. While all the circular investment among cloud computing companies, artificial intelligence software firms and chipmakers could help the neoclouds skirt some of this expense, it also means that pricier corporate debt could ripple through the sector. A spread refers to the difference in yield between two bonds that have the same maturity but different credit qualities. Typically corporate bonds are quoted by the difference above a Treasury security of similar maturity. Widening spreads suggest that investors see greater default risk and thus want to be paid more for it. Hyperscalers are continuing to boost their investments, with Google raising its capex projections for both 2026 and 2027, and the question of credit quality is becoming more of a concern for investors. “As we speak, spreads are widening out for hyperscalers and also [credit default swaps are] widening out quite substantially,” Apollo Global Management chief economist Torsten Slok told CNBC. “CDS for Oracle is at the same level it was at in 2008. At the same time, CDS also for the hyperscalers has gone off the bottom … the trend is certainly not your friend.” Analysts for Mizuho warned last weekend about wider spreads specifically in the context of the smaller, more highly indebted neoclouds. “We are also hearing some concerns on … neoclouds generating negative free cash flow, widening credit spreads and capital raise concerns,” Vijay Rakesh at Mizuho wrote in a client note. Neocloud CoreWeave has total debt of about 739 times its amount of equity, while Nebius has a debt-to-equity ratio of 131. Applied Digital has a debt-to-equity ratio of 172, according to FactSet data. By comparison, the big cloud companies have much smaller relative debt loads. Alphabet has a total debt-to-equity of about 18 as of the end of the June quarter. Amazon ‘s is 51, and Microsoft ‘s ratio is about 30, as of the March quarter end. Widening spreads and a changing risk backdrop Corporate credit spreads are expected to widen out later this year and into 2027. “We expect US credit spreads to remain broadly rangebound in Q3 before widening in Q4 and decompressing into 2027,” Matthew Mish, head of credit strategy at UBS wrote in a June 24 note to clients. He cautioned that “credit returns are unlikely to compensate investors for the risk backdrop in [the second half of the year].” A lot of tech financing – especially at the frontier – happens outside of standard bond issuance channels and some of it is kept off the books entirely. Analysts are still anticipating additional scrutiny as the computing buildout continues. “We expect more nuanced decisions around exposure and pricing as the multi-year AI investment cycle continues,” Amanda Lynam, chief credit strategist at Goldman Sachs, wrote on July 9. She predicted that “a range of financing markets will ultimately be required to satisfy the funding need,” including syndicated credit markets, private markets, joint venture funding structures and international finance capital. Debt markets have already been struggling to swallow the smorgasbord of bond issuance from the likes of Nvidia, SpaceX and Amazon in recent weeks. Relatively low rates secured for bonds issued by Nvidia and SpaceX flopped in the secondary debt market earlier this month while Amazon had to settle for rates that were high by its standards, The Wall Street Journal reported on July 12. Circular financing risks Circular investments within the tech sector, such as the backstopping agreements that Nvidia provides to its neocloud customers , could either aggravate or insulate against the effects of larger debt costs. “[Neoclouds] are already struggling to finance investment at the current bargain-basement price of $50B/GW,” analyst Jay Goldberg at Seaport wrote to clients on July 15. “To this end, Nvidia is now becoming more directly involved in financing.” Neoclouds can also create specialized debt contracts for particular projects that allow them to use the credit ratings of their hyperscaler customers, which affords them some protection. “CoreWeave did just that [for] their last data center capex, ” Paul Meeks, head of tech research at Freedom Capital Markets, told CNBC. However, these kinds of protections don’t apply to the cloud computing sector as a whole. The Bank for International Settlements – a coordinating body for central banks – warned this month that ample use of debt in the context of circular financing could lead to a bust. “The race to commit early through debt and circular financing also makes a bust more likely,” Phurichai Rungcharoenkitkul wrote for BIS on July 7. The bank’s analysis suggests overinvestment of 1.5 times the necessary level and that “stress in one firm could cascade to others through chains of financial exposures.” The overinvestment, paired with the contradictory mixture of competition and mutual investment at the frontier, is giving some investors heartburn. “My biggest concern is the credit quality of these companies that find themselves competing,” Dan Alpert, founding partner of Westwood Capital, told CNBC.
