The rapid expansion of artificial intelligence has propelled global stocks to record highs, but it has also led to a surge in debt financing for the data centres needed to power the technology. This trend is raising concerns about potential financial risks. A UBS report indicated that AI data centre and project financing deals have jumped to $125 billion this year, compared to $15 billion in the same period last year. T. Rowe Price’s Anton Dombrovskiy noted the rapid growth of public and private credit as a funding source for AI investments, highlighting the need to monitor this area closely. The Bank of England has also cautioned that the growing reliance on debt in the AI infrastructure boom could pose financial stability risks if valuations decline.
Christopher Kramer from Neuberger Berman noted a structural shift in the market, with major technology companies financing their AI infrastructure ambitions through debt issuance. This represents a significant change, as these companies have historically relied on strong cash flows. Investment grade debt market has seen a substantial influx of tech issuance in recent months, with companies like Oracle and Meta issuing large deals. JP Morgan estimates that AI-linked companies now account for 14% of its investment grade index, surpassing U.S. banks as the dominant sector. Oracle shares fell 13% after it sparked a broader tech selloff.
However, not all investors are on board. Al Cattermole from Mirabaud Asset Management stated that his team has not invested in any of the recently issued AI-linked investment grade or high-yield bonds. He expressed concerns about the untested nature of data centres being delivered on time, within budget, and providing the intended computing power. Cattermole suggested that investors should be compensated like equity holders, rather than debt holders, given the uncertainties involved. Private credit, extended by investment firms rather than banks, is also playing a significant role in funding AI data centres.
Securitised products, such as asset-backed securities (ABS), are also being used to finance the growth of the AI industry. These securities bundle together illiquid assets, such as loans or data centre rents, into tradable instruments. Bank of America notes that while digital infrastructure only accounts for a small portion of the U.S. ABS market, it has expanded rapidly in recent years. ABS are viewed with caution since the 2008 crisis, when billions of dollars worth of products turned out to be backed by soured loans and highly illiquid and complex assets. Oracle provides infrastructure as a service and platform as a service. Meta builds technologies that help people connect, find communities and grow businesses.
