“We will continue testing at what price levels investors will be able to participate in these transactions.” – JPM Head of European IG, Bloomberg, 27 Aug
Early Innings of a Buyer’s Market in AI Infra Credit
The sheer volume of issuance is forcing discipline back into the market after an initial honeymoon period where previously underweight market participants blindly absorbed any and all paper on offer.
Through August, we have already seen $2.2T in global IG supply driven by over $400B of AI-related issuance. This sets the tone across the risk-curve, including for the private and sub-investment grade markets.
Importantly, this incremental 20% of supply is now expected to be a recurring component of future volume supporting >$1T of projected AI capex per annum. As a result, the pressure to “chase deals” is getting dialled back.
Financing for US datacenters alone is already ahead of full-year 2025 and the pipeline is only accelerating from here:
Calling All Precincts
As the land grab intensifies, so does the fight for the marginal dollar.
Funding is becoming more onerous as participants hit concentration limits and originally pristine balance sheets draw increased scrutiny. We already discussed how some players like Oracle have maximised their borrowing capacity.
Even Nvidia is facing some resistance and scaling back off-balance sheet guarantees. The recent $500B announcement alongside Apollo, KKR, GS, Brookfield, BlackRock and Blackstone was just a glorified marketing pitch:
“This is calling all precincts […] not just one market of equity or debt or banks, but it’s all. It needs any and all.” – Jim Zelter, Apollo
Every nook and cranny of the market is now in play – term structures, private, public, equity, credit, structured, rated, un-rated, CAD, GBP, JPY, AUD.
The technical set-up is also compounded by an uncertain fiscal backdrop as even Bessent is competing for dollars at the long-end of the curve.
Game Theory Dictates Wider Spreads
The Goldilocks scenario is that deleveraging outpaces the physical limits of the capex pipeline. Our call is that the arms race inevitably ends up testing the limits of the market’s appetite to absorb incremental supply:
High ROI will only encourage more capex / issuance
Low ROI will trigger a negative credit event
What does this mean for yields?
In a bullish environment, continued supply & demand imbalance should generate attractive relative value options.
If we get a deeper dislocation, a large menu of absolute double-digit credit returns will be on the table and we will be in serious business.
Either way, we anticipate volatility ahead in what will increasingly be a buyer’s market and where alpha in credit security selection will make a comeback.
The HY Datacenter Project Finance Opportunity Set
HY datacenter project finance bonds are already showing dispersion with YTMs ranging from 6-10% and YTCs of 7-14%.
This segment of the universe is interesting as it has the potential to offer significant excess spread vs. maturity-matched Hyperscaler (tenant) risk.
Since these hybrid, non-traditional project finance deals came about as a way to bridge the gap between (i) Hyperscalers’ need to quickly ramp-up capacity and (ii) crypto miners’ transition to Hyperscaler landlords/REITs, there is both:
Significant nuance between the risk-profile of each offering
A clear opportunity for a re-rate post CoD
In particular, given the call features in place, we think there will be alpha in identifying the structures that offer the highest probability of an early take-out.
In the rest of the article, we highlight key considerations when evaluating and normalising these structures. We then use CIFR as a benchmark case study and discuss our preferred security within that complex.