Apollo Warns Hyperscaler Debt Is Becoming Riskier
Private equity firm Apollo Global has raised concerns about the increasing risk associated with debt issued by major cloud computing companies, or hyperscalers. The warning is based on rising credit default swap (CDS) prices for these firms' bonds, which indicate growing credit risk not driven by bank hedging but rather deteriorating fundamentals such as negative free cash flow and high leverage. Apollo's chief economist Torsten Slok noted that the widening gap between hyperscaler CDS spreads and those of banks suggests a shift in market perception. This comes amid calls from leaders of frontier AI model companies to slow technological progress due to safety concerns, which could affect cloud providers' financial outlook. Some analysts suggest these firms may be seeking regulatory protection similar to Section 230 of the Communications Act. Despite Apollo's warning, some Wall Street investors remain optimistic about hyperscalers’ improving profit margins and believe it is too early for alarm over CDS spreads. However, key players like Amazon and Meta are reporting negative free cash flow, while Alphabet also shows a significant deficit.
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Topics: AI Capex Cycle Credit Default Swaps Debt Financing Hyperscaler Companies