UBS: Rising AI financing costs are revealing increasing risks

This week, the US stock market's AI sector experienced significant adjustments, mainly attributed to concerns about financing and bond issuance risks such as CDS. The AI debt financing boom continues, but rising financing costs are now challenging the weakest borrowers and structures. Investors are reassessing financing needs, future supply, and realization cycles. However, the report characterizes this volatility as an internal rotation within the debt market, not a full-scale exit. Issuance of project-level and high-yield tech bonds has clearly slowed, while leveraged loan and asset-backed securities channels remain active, with new issuance pricing rising from around 8% to above 11%. Credit default swaps (CDS) for hyperscale cloud providers and semiconductors widened by an average of 43 and 35 basis points, respectively, with the sharpest increases seen in Oracle, CoreWeave, and Broadcom. The divergence between credit—reflecting the cost of delivering AI growth—and equities—reflecting expected return pricing—persists. CoreWeave’s unsecured bond yields have risen above 15%, whereas late-stage projects and high-quality tenants face debt costs nearly 200 basis points lower; structured credit provides a release valve for financing. Portfolio allocation remains underweight in project-level tech bonds, with strategies including shorting hyperscale cloud provider credit, going long their equities, and going long on the steepening tech curve, while remaining cautious on early-stage data center projects with low-quality tenants. For the full content, see the original link below.