Wall St. Races to Cut Its Risk From AI's Borrowing Binge

Watch Wall St. Races to Cut Its Risk From AI's Borrowing Binge - Bloomberg on Dailymotion

Transcript

00:00You know, when we talk about AI CapEx spending, there's an urgency now to hedge against potential AI bubble risk.

00:06And you can see that really embodied in the credit default swaps for Oracle, right?

00:10They're now at a three-year high, trading volume is up as well.

00:13Why is this the preferred vehicle? Does that make sense to you?

00:17Look, if you look at the big hyperscalers and the big CapEx names,

00:22I mean, the one who has free cash flow that's lower than the others and, you know,

00:26it could wind up being quite negative is Oracle, right?

00:28And so if you had to pick one where people would focus, yeah, I understand why that answer is Oracle.

00:34Also, you just had a lot of issuance coming in Oracle and therefore there was natural hedging demand.

00:40So sometimes what happens just from a technical standpoint is that builds upon itself, right?

00:45And it can be a little bit excessive at times too.

00:49But you do see from a free cash flow standpoint why people at least first focus on Oracle.

00:54So, Nali, what happens if Oracle gets downgraded to junk status?

00:59My colleague James Crombie on the credit team here says that Oracle would be about 10% of the entire high-yield market.

01:05And we know a lot of funds have a ceiling sometimes of maybe 2% on individual names.

01:09How disruptive would that be, hypothetically speaking?

01:12Yeah, this is absolutely, you know, an important topic because as you see investment-grade issuers,

01:19firstly with long-duration paper as well, which the high-yield market's not used to, have potential for being downgraded.

01:26That can lead to volatility and significant opportunities.

01:30You know, we remain poised to really act on these opportunities, looking for those overshoots

01:35and identifying where there might be some more room to go.

01:38Importantly, you know, when we look at our credits, we're really looking for those that have levers to pull to be resilient

01:46and those where, you know, valuation is supportive.

01:49So I think certainly this would be difficult for the high-yield market to digest a single capital structure

01:55from any of these hyperscalers or the like that are very large into high-yield.

02:00But usually that also leads to opportunities, right?

02:03Pickup and volatility can sometimes actually shake up even higher quality opportunities

02:09because sometimes investors need to sell what they can versus what they should.