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The amount of debt tied to artificial intelligence (AI) has ballooned to $1.2 trillion, making it the largest segment in the investment-grade market, according to JPMorgan Chase & Co.
AI companies now make up 14 percent of the high-grade market, up from 11.5 percent in 2020. The sector has surpassed U.S. banks, the largest sector on the JPMorgan US Liquid Index (JULI) index at 11.7 percent, JPMorgan analysts including Nathaniel Rosenbaum and Erica Spear wrote in a note Monday. The analysts identified 75 companies across tech, utilities, and capital goods sectors that are closely tied to AI, including Oracle Corp., Apple Inc., and Duke Energy Corp. Many of these firms are prolific debt issuers—and, in the case of tech, they are cash-rich with very low net debt. The cohort trades at 74 basis points (bps), 10 bps tighter than the broader JULI index, they said.
“Debt tied to AI companies is growing fast, but it trades tight for good reasons,” wrote the analysts. They noted that most of these companies are high-quality issuers, either cash-rich or not highly levered and are likely highly regulated, which justifies their outperfomance.
Companies linked to AI have seen their equity valuations skyrocket since ChatGPT launched the modern AI era three years ago, as investors rush to get exposure to the technology that has the potential to shake up the global economy. That’s sparked concerns that any setback in earnings from mega tech firms could trigger a broader selloff given their stretched valuations.
Debt investors are also scrambling to get a piece of the pie. Oracle’s $18 billion bond sale last month—the second-largest high-grade deal this year—garnered nearly $88 billion in investor demand. Banks and private credit firms have also been competing to underwrite debt deals supporting the development of large data centers.
Bank of America Corp., the biggest underwriter of high-grade debt on Wall Street, expects the AI build-out to help boost overall sales volumes over the coming years.
“The torrid ascent of AI stocks has caused some angst for credit investors worried that any potential downside there could have credit implications,” wrote the analysts. “From a fundamental perspective, these fears are not justified.”
Still, they added, an equity selloff in AI-related names would likely impact credit too, given how tightly it’s trading. There is a risk if these companies use their pile of cash to fund capital expenditure or mergers and acquisitions (M&A) ahead of debt redemption.
“We think select shorts in CDS can make sense as a cheaper tail hedge for a cross-asset portfolio,” they said.
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