AllianceBernstein's Smith: Debt Repricing Signals Rising Risks

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00:00Well, I do want to start with this. I mean, Oracle's already gone to the bond market. I mean,

00:03so far, investors have digested that. But the idea that when you have a company sitting

00:07on a $500 billion backlog that we know at least looking at its balance sheet,

00:12it can't necessarily fulfill based on the cash on hand. How much does Oracle, and for that matter,

00:17some of its peers, going back into debt markets become a credit event for everyone else?

00:23Yes. So Oracle really matters because it is the quote unquote harbinger of the AI CapEx boom. So

00:31investors are really focused on everything that Oracle has to say and crucially how they plan on

00:37financing the amount of CapEx that's going to be required for this generation of AI build. Now,

00:44what we think gets lost a bit is that investors are being skeptical in a lot of different ways.

00:50And we think this repricing in debt markets is very consistent with the view that risks are

00:56building. There's more uncertainty about the payback period, the amount of CapEx and the

01:00financing of that CapEx going forward. And to us, that's a very healthy dynamic for debt investors.

01:06So a healthy dynamic for debt investors. Does it get do we have to worry at all about the idea of

01:12credit quality or the complexion overall changing because of some of the and obviously we're talking

01:17hypotheticals here, but some of the new issuance that is likely to come down the pipe?

01:22We, of course, have to be concerned about it. I mean, as debt investors, that's really all we're

01:26doing is pricing what we think the downside risks are. And in this case, it is a little bit unique

01:32versus history because that risk is really building in the investment grade universe in some of the very

01:39best, most cash generative companies in the U.S. today. And that's different than other big CapEx

01:47booms. So in our view, that means the risks are really around credit downgrades. And we talk about

01:52Oracle and some other names. Maybe they're not as high quality as single A plus as they've been in

01:59the past, or maybe they're moving towards low triple B, high double B. And that requires a repricing of

02:04that risk. That's a different risk profile for investors. That gives investors who are willing to

02:11be a little bit more provocative an opportunity. And we think the recent repricing in most of these

02:17hyperscalers is a pretty good opportunity for debt investors to step in.

02:21Interesting. So just to make sure I'm understanding you, Will, so when you see some of those names,

02:25some of those hyperscalers who have been tapping the bond market in a big way come under pressure,

02:30it sounds like that would be a buying opportunity to your eyes.

02:34It does. And I think the crucial element here is these companies are not likely to spend all of this

02:41capex without some more clarity about what the payback period will be on these businesses. So I

02:48think in a lot of ways, investors are concerned that the payback period is super uncertain. And

02:53these companies are going to spend all this capital for the next five to 10 years, regardless of what the

02:58payback period looks like, what that revenue capacity really actually is. And we think that's a little bit

03:04backwards. These companies are likely to spend this much money if the revenues and earnings follow

03:10these these models and really accrue to these companies. And so we think that there's a little

03:15bit of a path dependency here that investors are missing. And I do just want to talk about supply

03:19overall. Again, a lot of this conversation is happening in the U.S. investment grade universe.

03:24You take a look at the house view over at TD. They would expect to see IG sales hit a record of

03:29$2.1 trillion in 2026, fueled by what we're talking about. Their view is that high grade spreads

03:37could reach a base range between 100 and 110 basis points, which isn't that high in the grand scheme

03:43of life. But you consider where we are right now on spreads around 80 basis points. Will, does it seem

03:48reasonable that we could meaningfully go above 100 next year? It certainly could happen, Katie. We think

03:55it's probably unlikely that it happens just because of supply issues. Supply is generally the mechanism

04:01that kind of corrects markets. So when we feel really good about the economy, growth and corporate

04:05earnings, we see more supply as a result. But if we start to feel less good about the direction of the

04:12economy or corporate earnings, then supply will start to decrease. And so we think that it's likely that

04:19spreads go wider at some point, but it's probably because we get concerned about growth at some point.

04:23Is there any sense, any sort of tie in with Fed policy and the idea of at least what we learned

04:30today and the idea of what the market has been trying to price in for 2026?

04:35For sure, there's a tie in. And when we think about what companies and investors are expecting

04:40for next year, in a lot of ways, you could be extremely excited about that outlook because you're

04:46seeing actually a pretty large fiscal stimulus come through next year at the same time the Fed's

04:52cutting rates. And we also have this manufacturing and capex resurgence as a result of artificial

04:59intelligence. So that could be a pretty positive dynamic for investors. And I think a lot of folks

05:05are looking at potential M&A activity and they're saying, well, I can probably buy these assets for a

05:11better price today than I might be able to in the next few years. And if I expect my cost of debt to

05:16move lower over that same time period, then that's probably my best opportunity to get these big M&A

05:22deals done. So we're likely to see a lot more of that happening.

05:25And it's interesting, Will, how private markets factor in. You point out in the notes you sent over

05:31to our producers that private investment grade funding will remain central to this AI build out.

05:36And increasingly, I mean, you think about issuers hopping back and forth between private and public

05:41markets to get this funding. It feels like that line is blurring. It for sure is blurring. The reality

05:48is, is the private credit market is now a really substantial part of how companies think about

05:53financing their businesses. And that is really unlikely to change. And when we think about the AI

05:59capex spend, it's going to require a lot of different types of capital to really achieve what we think

06:08will happen. So that's going to require private credit markets to look at deals in structured in

06:15a way that makes sense for them, bond markets, loan markets to also participate, and also for

06:20securitizations to happen as there's a lot of infrastructure that's required to make this happen.

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