00:00Bank of America's Global Fund Manager survey found that going long on global chipmakers is the world's most crowded trade.
00:06About 82% of respondents said that.
00:08And in the equity market, we know that that's something people are thinking about definitely.
00:13Chipmakers are, of course, the suppliers to the hyperscalers who are issuing all this debt.
00:18So, Maureen, I want to start with you.
00:20What kind of concentration risk exists on the credit side, on the debt side?
00:25So, I think we're starting to get to a point where you're reaching a little bit of saturation.
00:30Maybe just to put it in kind of index terms, just to give you kind of directionally where we are
00:33right now.
00:34You mentioned some of the bank supply earlier.
00:36The banks are still the largest component of the investment grade index.
00:40They represent about 11% of outstandings.
00:42The hyperscalers as a group, if you're counting kind of the big five, represent about 5% of the index.
00:47So, from an index perspective, it still suggests there's a ways to go before we really reach a meaningful saturation
00:52point,
00:53especially when you consider that the banks are in the market quarterly, funding fairly efficiently in our market.
00:58However, when you reach out the curve, just given the reliance of these borrowers on long-duration issuance,
01:03the concentration becomes a lot more extreme.
01:05So, if you just look at the long-duration index, hyperscalers are almost 15% of that number, right?
01:10And so, I think we're starting to get a lot more sensitivity in order books,
01:14as you see some of these primary deals move through the market around what types of valuations,
01:18what types of new issue concessions are going to be required for investors to buy that next transaction.
01:22So, there has been a meaningful amount of underperformance and hyperscaler spreads relative to the rest of the market
01:27because of this supply overhang.
01:29I think right now, it's still a valuation question.
01:31So, it's just a matter of where do these names need to trade from an ongoing perspective
01:35relative to the rest of the market to account for that supply overhang.
01:38I don't think it's a buyer's strike by any stretch.
01:40But, you know, we are starting to get the beginning of a market that's starting to get a little bit
01:45more disciplined.
01:46Investors are definitely becoming more discerning.
01:48And that same survey, Megan, finds that almost half of respondents, 48%, believe that the AI-linked CAPEX
01:54is seen as a most likely cause of any kind of systemic credit event.
01:58You say we're not in a bubble yet.
02:01Why do you add that yet?
02:03Yeah.
02:03So, we think we're firmly mid-cycle in credit markets.
02:07And I think the most important metric to track overall is the aggregate level of corporate leverage.
02:13And that has been incredibly stable.
02:15For certain pockets of the market, hyperscalers, for example, that is going up.
02:20And what we would look at to be more nervous is if you were to see CAPEX expectations rise for
02:26sectors outside of hyperscalers.
02:28So, do other of some of these old economy sectors start to participate in the AI build-out and start
02:35to spend more?
02:37In terms of areas that we do think look more bubblish, if you look at IPO activity, it's very, very
02:43similar to the late 90s.
02:45And if you think about credit markets, that's a risk for us because those could be potentially new issuers in
02:50credit.
02:51And we've actually seen that already happen.
02:53But for now, we do think we're mid-cycle, and that's very much driven by overall stability and leverage.
02:58And I'm so glad you bring up IPOs because Bloomberg reporting that Anthropics bankers are scheduling meetings with investors in
03:04the company in the coming weeks
03:05as that AI company gets ready to IPO perhaps as soon as October.
03:10Maureen, are we going to see Anthropic necessarily follow the SpaceX playbook of a massive IPO followed very quickly by
03:17a massive debt raise?
03:18I mean, I can't speak specifically to that situation, but clearly the AI sort of CAPEX super cycle is bringing
03:24a lot of new entrants into our market,
03:26both from sort of a rising star perspective, so issuers coming out of the high-yield market into the high
03:32-G market.
03:33We're going to get a lot of new names over the course of the next couple of years and potentially
03:37some new entrants.
03:38You know, I think the ratings outcomes on some of these things are going to be, you know, highly scrutinized,
03:43you know, at the end of the day.
03:45But our market is looking for some diversification, and the pockets are still deep for a lot of these names.
03:51So I do like to kind of emphasize that this is a $9 trillion U.S. dollar credit market in
03:56the IG space.
03:58And because we do have a fair amount of concentration risk, I think some diversity even within the sector will
04:03be welcome.
04:03If we do get the big debt issuance from a company like an Anthropic, for instance, Megan,
04:07what do you expect in terms of demand given the not great performance on the secondary market of NVIDIA and
04:13SpaceX bonds?
04:15I mean, how are conditions changing, evolving?
04:18Yeah, I think that performance of issuance from any hyperscaler will really depend on how we move through earnings.
04:24So exactly one week from today, we kick off hyperscaler earnings.
04:28We've seen a very consistent pattern leading into that.
04:32So two weeks heading into earnings, hyperscalers have generally lagged the investment-grade market
04:37in terms of spread in its anticipation, as you mentioned, of those CapEx numbers.
04:42We don't have much insight yet into official 2027 guidance, but this could be a window where we start to
04:49get it.
04:49So I think the market is looking for clarity around what is the end?
04:53When are we past peak CapEx?
04:54If we have that information, I think that the deals can perform better.
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