00:00J.P. Morgan's Global Technology Media and Communications Conference in Boston where Bloomberg Surveillance co-host Lisa Abramowitz is sitting
00:07down with J.P. Morgan Managing Director of U.S. Leverage Finance David DeBoltz. Lisa.
00:13Thank you so much Danny. I am here in Boston with David DeBoltz who heads up the tech leverage finance
00:19effort at J.P. Morgan. Thank you so much for being here.
00:22Thanks Lisa. So I want to start with just how much needs to actually get finance because the scope of
00:27the needs and the asks is pretty unbelievable staggering.
00:31What's your sense for the next five years of what's necessary. So the numbers are massive. You're absolutely right.
00:35And this is a big question that every buy side analyst investor is trying to get their grips around.
00:40There's a couple of numbers out there. Five trillion is the total hyperscaler capex over the next five years.
00:45If you think through what's happened in investment grade so far we've had 100 billion 150 billion sorry already this
00:50year.
00:51That same time last year was 20 billion. High yield 40 billion this year. Same time last year zero.
00:56So it really has become exponential in terms of the volume we're seeing.
01:00I spend most of my time with the investor side asking okay what is going to come this week.
01:05What is going to come next week. What's the what's the expected deal flow in the next three four five
01:10months.
01:10Everyone is working out where they're going to put that cash and how much cash do they have to hold
01:14for these deals.
01:15The good news is all of the deals so far have gone very very well.
01:18We're seeing oversubscription rates of two three four five times in some cases especially in the high yield space.
01:24And the market has actually phenomenally returned 10 percent year to date in HPC sector the high performance compute sector.
01:31The high yield index has only returned two percent.
01:34So you really cannot ignore this asset class when it's outperforming by 800 basis points.
01:38So the amount of capital coming into the asset class and investors who have been left out is still coming
01:43back in.
01:44So numbers are massive. The market is trying to get it in bite size.
01:48They're working out which asset class needs to take which.
01:51The good news is you've got investment grade. You have high yield.
01:53You have private credit. You have convertibles. You have equity.
01:57Private equity as of yesterday is putting a big amount into the space.
02:00So every asset class is getting ready to see how much they can put in and they want to and
02:04isn't obviously an attractive asset class to continue to be in.
02:07Where's the money going? Is this all just going to data centers?
02:09The big use case right now especially in high yield is in data centers.
02:13So we've seen about 15 deals so far just in pure data centers.
02:17But we saw about four weeks ago the first GPU deal.
02:21So pure just GPU rollout obviously for NVIDIA chips.
02:24And we're seeing a lot more of those projects come through.
02:26So hold on a second. So the GPUs have like a three year cycle and then they depreciate pretty significantly
02:31potentially.
02:32Five to six. Five to six. All right.
02:33But either way I mean there's a sense that there is a sort of end date on some of these
02:37investments.
02:38Did investors get a little queasy about that?
02:40The amazing thing on Bloomberg if you actually pull up the H1 in H100 index you can see the smile
02:45curve on the actual secondary market on H100 trips.
02:49So yes about six months ago everyone was wondering through that depreciation cycle the use case.
02:53I think the narrative is actually turned. The narrative is now OK even in five six years there is demand
02:58for these chips.
02:59And that is obviously enabling people to lend into the GPU asset class.
03:03What about concern about regulation. There was a big story that was getting a lot of attention this morning.
03:07The CEO of Standard Chartered was talking about lower value human capital that he was getting rid of in favor
03:13of AI.
03:14A lot of people are very nervous about this. Will the regulatory regime potentially crimp some of these investments.
03:19Look so right now the regulation side is obviously a little bit lax in regards to allowing a lot of
03:26data centers to go and get built very quickly.
03:29And permitting rules are pretty attractive where data centers are getting built.
03:33There is a bit of a race to get data centers built. You're seeing capital requests coming in thick and
03:37fast.
03:37Right now if you think through what is the data center itself if that is already built and additional regulation
03:44comes up does that make that data center already built more attractive versus a potential oversupply risk.
03:49I think that's actually helpful. So right now with regulation where it is and getting these deals done it actually
03:54works in the inverse case where these deals are more more attractive if they're built and they're up and running.
03:58One conundrum this year has been the absolute record pace of issuance in a whole host of ways and yet
04:04benchmark interest rates keep rising and people wonder when is that going to sort of squeeze people out of the
04:08market.
04:09Have you seen any kind of pullback as a result of say 30 year yields going to the highest level
04:13since 2007.
04:14Yeah it's probably the biggest topic in the last couple of weeks. Where are rates going what is coming from
04:19inflation especially secondary impacts from the Middle East from supply chains.
04:23Where are rates going to go. There's an interesting dynamic in the AI space where these depending on the leverage
04:29you put into the data centers you can choose between being investment grade or high yield.
04:33So in the high yield space we have five year debt non call to so you can call the debt
04:38after two years.
04:39So even if rates go up 100 basis points 150 basis points is that going to prevent you from going
04:45and having an attractive return from your equity equity side on the on the data center.
04:50The answer is no. So yes there is sensitivity but the rate sensitivity in the high yield asset class is
04:56just a lot lower versus investment grade investment grade locking in debt for 16 years.
05:00That is a very different proposition when you're locking it in a hundred basis points higher.
05:04So yes I think it's going to be a key driver of the markets the next six seven months just
05:10in regards to rates.
05:11But right now the high yield market is absorbing it.
05:13So you think that right now even some investment grade companies could potentially choose to issue in the high yield
05:18market because of the shorter duration in the call structure.
05:20Correct. You can actually toggle up your leverage.
05:22So for example we had an issuer who decided to go investment grade.
05:25They could have done higher leverage.
05:27So they could have gone high yield but they wanted to go lower and leverage and go into the investment
05:31grade space.
05:32That same issuer potentially is now thinking about going OK I'm going to have a higher leverage proposition going forward.
05:38I'm going to go into the high yield space because I don't like the rate backdrop and I can call
05:42that debt in two years.
05:42Just real quick here. A lot of people have been worried about software debt and the scale of potential refinancings
05:48coming down the pike.
05:49What's your concern level. What are investors concern level about potential losses there.
05:53Well actually just quickly on that dynamic that software dynamic.
05:56That is why there is so much cash going into the AI space.
05:59Typically on the software side software makes up about 15 percent of loans about 5 percent of high yield.
06:05All of that cash they don't want to lend into software typically right now.
06:08So all of that cash is going into AI. Now there is a big maturity problem coming in software.
06:14If you think through private credit and leverage loans is about 100 billion in 28 and 2029.
06:20That needs to get addressed. It slowly is getting addressed.
06:23We led a deal last week for four and a half billion to start to address that problem.
06:27There's more deals that have launched today to start to address that.
06:29But some of these companies are more levered potentially at higher risk of AI disintermediation.
06:35So what's the question there. Do they have access to the market.
06:38I'd say right now with the health of the markets they do have access.
06:41But it is no time like the never. They need to get going on this because the closer you get
06:45to that maturity.
06:46The easier it is for the buy side to push back and demand tighter terms higher pricing.
06:52And that really is going to impact that whole asset class.
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