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The AI buildout may pay for itself
The credit gap
Hyperscaler operating cash flow comes to 1.3 to 1.4 trillion dollars in those estimates. If the chips monetize at a discount to current Blackwells instead, the figure is closer to 2 trillion dollars, which takes about 700 billion dollars of credit demand out.
Why debt worries
Credit is the part that worries. Real yields have gone up, spreads have widened, and credit default swaps are up for everybody, and a Meta bond last week did not price where a Meta bond would be expected to. A debt-fueled buildout demands immediate repayment, so if supply and demand drift apart, things can unwind very fast, which is what happened to the internet.
Cash flow as funding
Higher operating cash flow improves every credit ratio, which makes credit easier to get if it is wanted. Consensus models a deceleration in operating cash flow even though it has been accelerating, and Microsoft brought out a huge slug of capacity in June that did not show up in the second quarter. If compute reprices at current rates, most or all of the buildout could be funded out of operating cash flow for the next several years.
How did the internet buildout unwind fast?
In the late 1990s, telecom companies borrowed heavily to lay fiber-optic cable, expecting internet traffic to keep doubling at a pace that turned out to be too high. When demand grew more slowly, many of those borrowers defaulted in 2001 and 2002. A large share of the installed fiber sat unlit for years and was called dark fiber. The cable was eventually used as traffic grew over the following decade.
How does cash flow improve credit ratios?
Credit analysts at agencies such as Moody's and S&P track ratios like debt to earnings and interest coverage. When operating cash flow rises, debt shrinks relative to earnings and interest payments take up a smaller share of income. Those ratios feed into a company's credit rating. A higher rating lowers the yield that lenders demand on new bonds.
Why do credit spreads widen in stress?
A credit spread is the extra yield a corporate bond pays over a Treasury of the same maturity. That extra yield compensates lenders for the chance of default. When investors become more uncertain about borrowers, they demand a larger cushion, and the spread widens. Credit default swaps, which are contracts that pay out if a borrower defaults, also rise in price in those periods.
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