AI debt explosion has traders searching for cover

Credit whiplash

- CALEB MUTUA

As tech companies gear up to borrow hundreds of billions of dollars to fuel investments in artificial intelligence (AI), lenders and investors are increasingly looking to protect themselves against it all going wrong.

Banks and money managers are trading more derivatives that offer payouts if individual tech firms, known as hyperscalers, default on their debt. Demand for credit protection has more than doubled the cost of credit derivatives on Oracle’s bondssince September. Meanwhile, trading volume for credit default swaps tied to the company jumped to about $4.2 billion over the six weeks ended November 7, according to Barclays credit strategist Jigar Patel. That's up from less than $200 million in the same period last year.

“We're seeing renewed interest from clients in single-name CDS discussions, which had waned in recent years,” said John Servidea, global co-head of investment-grade finance at JPMorgan Chase &Co “Hyperscalers are highly rated, but they've really grown as borrowers and people have more exposure, so there is more client dialogue on hedging.”

Oracle declined to comment.