Major cloud infrastructure providers are dramatically increasing their capital expenditure on artificial intelligence, increasingly turning to credit markets for funding.

However, investors note this trend challenges the perceived financial invulnerability of large technology firms and violates an implicit understanding that speculative AI investments would remain largely separate from debt financing.

Following announcements from Amazon, Meta, and Alphabet of substantial increases in their annual capital expenditure budgets during earnings reports, UBS data suggests combined AI infrastructure spending could reach $770 billion by 2026—approximately 23% above prior forecasts.

In a February 18 analysis, UBS credit strategists indicated these spending hikes could lead to an additional $40 billion to $50 billion in borrowing from major tech firms, potentially raising total public debt issuance to $230-$240 billion this year.

According to Al Cattermole, fixed income portfolio manager at Mirabaud Asset Management, this pivot toward bond markets is significantly altering the relationship between large tech companies and their investors.

"The unwritten agreement appears to be changing. Previously, AI capital expenditure was expected to be funded by equity or cash reserves. Now, by financing these investments through debt markets, creditworthiness becomes a central concern," Cattermole noted.

Tipping Point

Oracle's record $18 billion bond issuance last September marked a significant shift, with Alphabet following suit by issuing approximately $20 billion in debt, including a rare century-denominated bond in British pounds.

This surge in borrowing has intensified scrutiny of the sector's debt levels.

"These highly-rated tech companies were traditionally viewed as virtually cash-equivalent. The sudden accumulation of substantial debt represents a notable change in strategy that the market is still adjusting to," Cattermole observed.

Investors are growing concerned about future challenges. BlackRock suggested major tech corporations are leveraging current favorable credit conditions to finance present investments against anticipated future revenue.

"Increased corporate borrowing adds pressure to bond markets already strained by significant public deficits," BlackRock stated in its weekly commentary.

The asset manager added that market attention has shifted toward how AI integration will generate actual revenue and profit, creating ideal conditions for active investment strategies to distinguish between potential winners and losers.

BlackRock also noted that since AI developers have predominantly utilized the U.S. investment-grade market, it now favors high-yield and European bonds.

As Oracle's stock price has declined over the past six months, credit default swaps on its debt have experienced considerable volatility.

Cattermole highlighted Alphabet's planned capital expenditure nearing 50% of next year's revenue as approaching an unprecedented level, signaling a fundamental shift in market cycles.

Underlying Vulnerabilities

Investors worry that massive data center investments—crucial for AI infrastructure—face obsolescence risks from rapid technological advancements that could improve chip efficiency and reduce capacity needs.

Cattermole emphasized the long-term implications for debt holders, questioning the viability of investments if competing technologies surpass current standards within the debt period.

Vanguard senior economist Shaan Raithatha acknowledged that AI infrastructure companies begin from positions of strength with robust financials and competitive advantages, but confirmed they are indeed increasing their leverage.