AI-related debt binge may pressure European bond markets

Nov 3 : Europe's bond markets face a fresh headwind as US technology companies increasingly tap European investors to finance AI spending, boosting corporate debt supply and potentially lifting borrowing costs for other firms and governments.

While tech-related borrowing in Europe has lagged the United States, investors say that leaves scope for a larger wave of issuance across euro, sterling and Swiss franc markets in coming months.

Alphabet launched its second euro-denominated bond sale this year on Monday, following a €9 billion ($10 billion) issue in May.

Investors expect other so-called hyperscalers — or Big Tech companies — including Meta, Amazon and Microsoft, to increase borrowing outside the US as they fund large-scale AI infrastructure investments.

"Europe has been behind the US in terms of issuance in the tech space but the activity is accelerating," said Marion Le Morhedec, chief investment officer for fixed income at Fidelity International.

She estimates that €40 billion to €60 billion of issuance is in the pipeline.

Issuing debt in foreign currencies also allows companies to hedge the currency risk from their global assets, while taking advantage of relatively lower borrowing costs in markets like Europe.

Europe's deep capital markets offer an attractive source of funding. But while greater issuance expands the pool of highly rated corporate debt available to investors, it could also raise borrowing costs for European companies and governments already grappling with fiscal and inflation concerns.

TECH BORROWING ACCELERATES IN EUROPE

US markets have absorbed more than $250 billion of technology-related debt issuance so far this year, up 81 per cent from the same period last year. In Europe, issuance totals $39.3 billion, up about 5 per cent year-on-year, LSEG data shows.

Despite investor concerns over whether Big Tech's massive AI investments will deliver returns quickly enough — spurring a selloff which erased more than $2 trillion from the tech-heavy Nasdaq's market value last month — analysts and investors expect bond issuance to remain strong.

BNP Paribas expects euro-denominated investment-grade corporate bond net supply to rise 83 per cent to €192 billion ($214 billion) in 2027, up from €105 billion this year.

Offshore bond issuance by US companies — dubbed the "reverse Yankee" in reference to Yankee bonds — is forecast to account for around €80 billion to €90 billion of the 2027 total debt supply, with hyperscalers making up the bulk of that, said Giulio Baratta, global co-head of investment grade finance at BNP Paribas.

"It is undeniable that if any of these hyperscalers go into the market with a multi-billion deal to execute in a day, everybody knows about it and everybody needs to pay attention," said Baratta, who helped arrange Alphabet's May euro bond sale.

JUMBO DEALS COULD TEST DEMAND

The influx of debt could widen investment-grade credit spreads as hyperscalers compete with other highly rated borrowers across sectors such as utilities, telecommunications and automakers for investor demand.

Asset swap spreads on the ICE BofA Euro Investment Grade index widened by 11 basis points last month, suggesting investors are demanding greater compensation to hold corporate bonds relative to interest-rate swaps.

Issuers may need to offer pricing concessions to secure sufficient demand as supply expands, analysts say, potentially raising funding costs for other companies.

Investors in European markets also have less experience absorbing the multitranche transactions that have become commonplace in the US. Such deals could therefore temporarily widen European investment-grade credit spreads, said Jonathan Owen, a member of TwentyFour Asset Management's multi-sector bond portfolio management team.

SOME EUROPEAN ISSUERS SHIFT TO SHORTER MATURITIES

Strong investor demand has so far absorbed the supply. But a series of jumbo deals of €10 billion to €20 billion could test that appetite, particularly if several issuers come to market simultaneously, analysts said.

Some European companies are already responding to volatile long-term yields and expectations of heavier issuance by favouring shorter maturities, investors say.

"We definitely observe that corporate, non-hyperscaler corporate issuers are staying away from the long end," said Vontobel portfolio manager Christian Hantel, without naming specific companies.

"What has been a normal 10-year maturity bond, now they move to five to seven years."

The additional issuance could further weigh on government bond markets, which are already under pressure from investor worries about fiscal and inflation risks.

European Central Bank President Christine Lagarde said last week that debt issuance by hyperscalers had contributed to rising sovereign bond yields.

"People are very much focused on the amount of AI supply that we're getting at the long end and what that means for government bonds," Owen said, adding that hyperscaler debt offers high credit quality while typically yielding more than government bonds.