International markets are becoming vital for hyperscalers as they seek to fund massive AI infrastructure projects through substantial debt issuance. Companies like Alphabet, the parent of Google, and Amazon are leading the way, tapping into smaller markets such as Europe and Japan to diversify their funding sources. This trend reflects a significant shift in the corporate debt landscape, which is valued at an estimated $40 trillion globally.
Hyperscalers: Record Borrowing Across Currencies
Alphabet has emerged as one of the largest borrowers in both the sterling and Swiss franc corporate bond markets. In March, Amazon made headlines by raising €14.5 billion (approximately $16.88 billion) through an eight-part bond deal, marking the largest issuance in the euro corporate bond market to date, according to LSEG.
These debt issuances by hyperscalers are part of a broader strategy to finance trillions of dollars in AI infrastructure investments, particularly in data centres. Bankers indicate that diversifying funding sources early on is crucial for these companies as they prepare for substantial future expenditures.
Hedging Against Currency Risks
By raising debt in foreign currencies, hyperscalers can effectively hedge against currency risks associated with their global operations. Additionally, they can exploit the relatively lower borrowing costs available in regions like Europe. Alphabet has set records in multiple currencies, including yen, Canadian dollars, Swiss francs, and sterling, showcasing the growing attractiveness of these markets.
Giulio Baratta, co-head of investment-grade finance at BNP Paribas, stated, “If you look at the pace of investment of these companies and if you fast forward 12 months, some of these companies are already going to become among the biggest issuers globally in any currency.” This observation highlights the potential for hyperscalers to dominate international borrowing in the near future.
Record Corporate Debt Issuance in Europe
This year, borrowing by non-financial US firms in Europe has exceeded €60 billion ($69.85 billion), driven largely by the activities of Alphabet and Amazon. According to Morgan Stanley, total borrowing from hyperscalers in euro-denominated debt could reach around €50 billion in 2023, potentially allowing the US to surpass France as the largest source of corporate debt in the euro zone.
John Servidea, global co-head of investment grade finance at JPMorgan, noted, “A lot of these markets, including euro, have evolved and now offer a lot more depth and opportunity for larger capital raising than was historically the case.” This evolution indicates a significant shift in how US companies, particularly hyperscalers, view international markets.
Shifting Investor Focus
As hyperscalers engage in major debt transactions, there has been a noticeable increase in non-financial corporate bond sales in currencies like the Swiss franc and yen. This trend has not gone unnoticed by US companies that are now more seriously considering international markets for their borrowing needs.
Investors are increasingly diversifying their portfolios away from the US dollar due to geopolitical tensions and uncertainties in policy. As a result, borrowing in currencies such as the Australian and Hong Kong dollars has surged this year.
Growing Non-Dollar Issuance
According to Bank of America, hyperscalers have seen their non-dollar bond issuance double, now accounting for 30% of their total funding. Borrowing abroad allows these companies to space out their engagements with the US market and, in some cases, secure lower borrowing rates. Servidea from JPMorgan remarked that this approach helps mitigate the negative impacts that heavy borrowing can have on a company’s bonds.
Baratta emphasised that the funds raised are primarily kept in the currency of issuance rather than being converted back to US dollars. This strategy allows hyperscalers to maintain flexibility and manage their financial exposure more effectively.
Investing in AI through International Bonds
Investors are keen to build exposure to the AI sector, particularly in international bond markets where technology companies have historically had a limited presence. Nicolas Forest, chief investment officer at Candriam, is actively purchasing euro-denominated bonds from hyperscalers to enhance exposure to the tech sector in Europe.
By the end of April, Alphabet had already secured its position as the fourth-largest borrower in ICE BofA’s sterling corporate bond index and the sixth-largest in Swiss francs, showcasing its rapid ascent in these markets.
Future Implications for Corporate Bond Markets
As tech issuance continues to rise, corporate bond markets outside the US are expected to become increasingly influenced by developments within the tech sector. Analysts warn that any setbacks in AI could lead to heightened volatility in these markets, which are still adjusting to the presence of major tech firms.
David Zahn, head of European fixed income at Franklin Templeton, noted, “If there are any problems with AI, it will probably create more volatility.” This perspective underlines the intertwined fate of hyperscalers and the bond markets they are entering, suggesting that while opportunities abound, risks are also being introduced.
