Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 640

AI’s debt binge draws European telco parallels

Certainly 2025 will go down as yet another year dominated by the growth of the major technology companies, with AI themed investments headlining a surge in equity and debt capital market activity. Much of this activity is funding burgeoning AI capital expenditures with further significant growth expected in coming years as the major technology players make an almost 5x increase in combined capital outlays over the 7 years to 2028 (refer Chart 1).

Chart 1. AI ‘Hyperscalers’ – Annual Capex Expenditures (Actuals and Estimates, $USbn)

Source: Bloomberg/Yarra, Nov 2025.

Aside from growth in capital expenditure fuelling equity prices and underpinning US economic growth, the major global technology players are increasingly turning to debt markets for funding. Mega debt deals this year are already many multiples of previous annual totals, with the prospect of much more debt issuance to come (refer Chart 2).

Chart 2. AI Tech Giants – Borrowings (Bonds and Loans, $USbn)

Source: Bank of America/Yarra, Nov 2025. * New borrowings to Oct 2025.

Renowned for their credit worthiness and strong cash flow generation, the AI hyperscalers appear very well placed to manage increased debt on their balance sheet. But everything, including even AI, has its limit. Given capital expenditures are expected to accelerate further over the outlook, we may very well reach the theoretical limits of debt funding in the years ahead without significant downgrades in credit quality, even for such illustrious names as Amazon, Google, Meta, and Microsoft etc.

To date, credit markets have absorbed large sums of new debt from AI companies, but higher Credit Default Swap (CDS) pricing is beginning to reflect some indigestion across the sector. This especially the case for triple B rated Oracle (refer Chart 3). Going forward, further debt capital issuance is likely to further pressure credit spreads.

Chart 3. CDS Spreads – US Technology Companies (bps)

Source: Bloomberg/Yarra, Nov 2025.

For those of us in credit markets, major events can often be eerily similar to historical periods. From our perspective, highly rated AI companies increasingly tapping debt markets to fund burgeoning capital expenditures bears an uncanny resemblance to the early 2000s, where similarly rated European telcos (massively) overpaid for 3G spectrum licenses and associated infrastructure. In the second half of 2000, the likes of Deutsche Telekom (DT), Orange S.A. (France Telecom), British Telecom and Vodafone etc., used debt funding to pay European governments more than $US100 billion for 3G spectrum licenses on the lucrative early promise of the ‘Internet of Things’ (IOT) age.

As we now know, those roads to 3G riches were more potholed than expected, with associated debt issuance and lower-than-expected returns leading to significant negative credit migration and much higher credit spreads. For instance, the spreads of Credit Default Swap – insurance against default – for DT peaked at 400bps in 2002 (refer Chart 4) and its credit rating declined from a high of AA- in 2000 to a low of BBB+ in 2004. It still resides there some 20 years later.

Chart 4. CDS Spreads – CDS Spreads – European Telcos (bps)

Source: Bloomberg/Yarra, Nov 2025.

The history books confirm that credit investors incurred significant marked-to-market losses funding Europe’s 3G capital expenditure binge in the 2000s, with a sense of Déjà vu now on the horizon for AI investors. While current credit quality – as assessed by S&P – for the likes of Meta (AA-), Amazon (AA), Alphabet (AA+) and Microsoft (AAA) is unquestionably pristine, if the past experience of the European telcos are anything to go by, their credit quality is unlikely to remain so. We believe the credit ratings of hyperscalers in the years ahead are likely to migrate down to single A and maybe even triple B categories.

Credit investors buying the bonds of hyperscalers should clearly be factoring in future credit migration risk into new issuance credit spreads, which for the most part does not appear to be occurring. For instance, Meta recently issued $US13bn (total) across 10 and 30-year tranches at Treasuries +78 and 98bps respectively. While you can debate whether the 10-year securities represent good value, we struggle to make any coherent argument in support of the relative value of the 30-year tranche, with any negative credit migration in the years ahead likely to lead to steep mark-to-market losses.

 

Phil Strano is Head of Australian Credit Research at Yarra Capital Management, a sponsor of Firstlinks. This article contains general financial information only. It has been prepared without taking into account your personal objectives, financial situation or particular needs.

For more articles and papers from Yarra Capital, please click here.

 

  •   3 December 2025
  • 1
  •      
  •   

RELATED ARTICLES

Dotcom on steroids Part II

3 reasons the party in big tech stocks may be over

Balancing opportunity and complexity

banner

Most viewed in recent weeks

Testamentary trusts post-budget: Estate planning, tax reform and the ‘death tax’ debate

Proposed Budget changes to taxation are casting new uncertainty over testamentary trusts, prompting closer scrutiny of estate planning structures and the real implications of reforms still taking shape.

High quality businesses are on sale

Beneath the dominance of the ASX's largest stocks, much of the market has been left behind. High-quality companies are now trading at levels rarely seen, offering opportunities for investors willing to look deeper.

Meg on SMSFs: The CGT changes don’t impact super but what about Div 296 tax decisions?

New CGT rules could tip the scales in the super vs non-super debate. For those facing the Division 296 tax, the case for withdrawing has gotten more complex. A "comparison rate" tool may help assess decisions.

The strange effect of the 30% minimum capital gains tax

The 30% minimum tax on capital gains sits at the heart of the budget's proposed reforms. Yet the mechanics reveal anomalies that introduce unexpected distortions that raise questions about its design.

Ranking three common retirement strategies

The defining challenge of retirement isn't just about building wealth, it's about converting your lifetime savings into sustainable income. A holistic understanding of different strategies can improve long-term outcomes.

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Latest Updates

Planning

Does your will qualify for the discretionary testamentary trust exemption?

Treasury has confirmed the exemption many families were hoping for. But buried in the fine print are two conditions that could leave some wills on the wrong side of the exemption, despite years of careful planning.

Lithium's latest drop and what it means for ASX investors

Lithium's latest sell-off has punished ASX miners as prices remain hostage to shifting expectations. The key challenge is navigating a market prone to extreme volatility despite a strong case for the long-term demand outlook.

Investment strategies

CGT reform and fund turnover: who really feels the impact?

The implications of CGT reform are far and wide. As the 50% discount gives way to inflation indexation, turnover and return profiles may become critical drivers of after-tax performance. Some strategies face a far greater hit.

Superannuation

Super was built for a very different Australia

Our retirement system was built around assumptions that no longer hold. Lower homeownership, longer lifespans and changing expectations are exposing cracks that policymakers and super funds need to address.

Retirement

Retirement in reality - 4 months in

Many people spend years planning financially for retirement but little time preparing for what comes next. Four months in, here are the surprising lessons I've learnt on finding purpose, social connection and healthy habits.

Investment strategies

After the Budget, Australia needs its own definition of quality

As tax reforms reshape investment incentives, investors should rethink what quality investing means in the uniquely concentrated Australian market, where traditional frameworks may not translate as effectively.

Datacenters are the new shale oil

Why are tech giants pouring billions into datacentres when the economics look questionable? The most dangerous words in investing may be: "everyone else is doing it". Today's AI boom has striking parallels with the shale bust.

Sponsors

Alliances

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.