Alternative asset management heavyweight Apollo has issued a warning that credit risk among hyperscale cloud companies is systematically rising as tech behemoths take on massive debt to fund artificial intelligence infrastructure, while equity markets have yet to fully price in this growing threat.

On September 6, Apollo chief economist Torsten Slok argued that the market is now reassessing the credit fundamentals of hyperscalers, noting that a debt-fueled AI capital expenditure cycle is pushing leverage ratios higher, driving free cash flow into negative territory, and leaving the return prospects for depreciating assets highly uncertain.

Apollo data shows that the spread between hyperscaler credit default swap (CDS) rates and bank CDS rates has widened from near zero to approximately 60 basis points since October 2025.

Moreover, since the end of June, the equity performance of hyperscalers has continued to decouple from their rising credit risk profile.

Credit markets are typically viewed as a more sensitive early-warning indicator of risk. The independent widening of CDS spreads suggests that bond market investors have already cast their vote on the sustainability of AI capital spending, while equity market pricing may not yet fully reflect this mounting credit pressure.

It is worth noting that several leaders in frontier large language models have recently indicated a desire to slow the pace of product iteration for safety reasons. If such statements translate into action, they would directly impact the commercial prospects of cloud service providers hosting these models, further intensifying concerns over the credit health of hyperscalers.

Four Giants Show Three Negative Free Cash Flows, One Positive

According to FactSet data, the financial positions of major hyperscalers broadly reflect a stressed cash flow environment.

Google has a forward debt-to-equity ratio of 13% and a forward free cash flow of negative $25.7 billion.

Amazon posts a debt-to-equity ratio of 23% and free cash flow of negative $30 billion.

Meta carries a debt-to-equity ratio of 34% with free cash flow at negative $25.7 billion.

In contrast, Microsoft stands out as the exception among these major players, with a relatively solid financial profile: a debt-to-equity ratio of just 7.34% and positive free cash flow of $33.4 billion.

This data landscape reinforces Apollo's core thesis: hyperscalers are relying on debt to sustain high-intensity capital expenditure, while the payback period for AI infrastructure investments remains highly uncertain, and depreciation pressure on related assets is already present.

The continued rise in hyperscaler CDS contract prices reflects the increasing cost for investors to insure against default risk on related bonds.

Notably, Torsten Slok has explicitly ruled out an alternative explanation that the spread widening stems from underwriters hedging new bond issuance. He points out that if this were the case, bank CDS spreads should have widened in tandem, given that banks remain the largest single source of investment-grade bond supply. However, bank spreads have held steady at around 40 basis points, barely moving at all.

This suggests that the rise in hyperscaler credit risk is independent in nature, representing a market-driven repricing of their own underlying fundamentals.