00:00Bloomberg credit market reporter Tassos Vossos. Tassos I mean it is remarkable to see the remake of the credit market
00:06in the image of AI and tech.
00:09How much of it is changing the business of banks. Well it's very easy to explain. The same time last
00:16year those credit derivatives and the
00:18hyperscalers were nonexistent. There was zero for most of these names mostly because they didn't have any debt at all.
00:24And then they started
00:25issuing debt at an unprecedented pace. Banks that help them issue debt either directly or through bond issuances they actually
00:31have to
00:31hedge against them. You would claim well you know the hyperscaler is never going to go bust. Yeah but banks
00:36don't really care. They have to
00:37hedge their exposure and then come the hedge funds and say okay bank I'm going to sell protection to you.
00:45And now you have from zero this
00:47multi-billion dollar business that sprang out of nowhere with hedge funds actually selling credit protection to banks that needed
00:53because of
00:54their exposure to AI. So basically massive demand for these products. Absolutely. And in a way somebody would say because
01:03those
01:04hyperscalers are so high quality. I mean their credit rating is higher than the credit rating of most countries in
01:10the world. You would think that
01:12selling protection against them is free money. You know inverted commas because you know you get hundreds of thousands of
01:20pounds
01:20every month for that. At the same time will the companies that are part of the CDS are they going
01:27to default at any stage. At the
01:29current stage you can say of course not. So that is like a lucrative business that is very low risk
01:34for all those hedge funds. Yeah.
01:37Like at what point though does this get crowded. Does the arbitrage run out or is that just not the
01:42case because as to what you're saying
01:44the optimism in that these are not companies heading towards any sort of default or credit risk. Indeed. So that
01:52is going to
01:53be based on how much more debts those companies issues in the next few years. And the forecast for that
01:59is they're going to have to
01:59issue hundreds of billions more. So at the same time you're going to have billions more of CDS. So you
02:06will need to buy more of
02:07that you'll need. So more of this this machine this engine that we've pointed out the story is going to
02:11go bigger and bigger and
02:12bigger. At the same time at some point in the future we're going to see winners and losers. So right
02:17now we may be saying
02:18that every single one of those companies seem to be a winner of the race. Well at some point we
02:23may not have every single company
02:25being a winner of the AI race. So then you'll say bifurcation between the CDS of the good companies the
02:30CDS of the bad
02:31companies. And that's going to have implications for the people who bought it i.e. the banks and the people
02:36who sold the
02:37protection i.e. the hedge funds.
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