Transcription
So, right after the markets closed yesterday afternoon, CNBC released a story. The title is Moody's says unprecedented AI spending threatens credit quality of Amazon, Meta, Alphabet, and others. I just finished reading uh that story, and Mr. Ditzky sent me another story that was that hit yesterday from the FT I'm going to share with you. So, stick around and watch the video.
So uh the the article from CBC CBC says the race to build artificial intelligence infrastructure at a trillion dollar annual clip is eroding the free cash flow and increasing balance sheet risk at so-called hyperscalers warned Moody's ratings. In a research note released this week, Moody said that the spending surge is forcing even the world's most cashrich corporations like Alphabet and Microsoft to lean heavily on debt stock sales and offbalance sheet moves to fund their AI ambitions. I'm going to share with you a massive offbalance sheet uh deal that just uh was came out with Black Rockck and Meta.
So says the moves threatened. This is from Moody's. This is a warning sign guys. The moves threaten credit quality for the six companies tracked by Moody's which include Microsoft, Amazon, Alphabet, Meta, Oracle and Core Weave. According to the report, the ratings firm projects that capital expenditures which are investment for physical assets like data centers will hit $785 billion in 2026 before reaching about a trillion dollars next year.
Says, "The shift breaks a decadesl long Silicon Valley formula that created the world's most valuable companies. Software costs little to replicate, yielding fat profit margins and fortress balance sheets. Generative AI, it says, by contrast, demands a vast, excuse me, vast physical footprint warehouses crammed with expensive and energy hungry servers and chips."
Says, "To keep direct debt off their balance sheets, hyperscalers are leaning on off-balance sheet financing, mostly through long-term data center leases," the report explained. And Moody says that the lease commitments across the group have ballooned to $1.2 trillion when 820 billion of that total is from leases that haven't started yet, meaning the data centers are still being built.
It says, this is from Moody's. While those obligations don't show up as a traditional debt, Moody's says it considers them as debt equivalent liabilities that will bind to companies to significant rent payments down the line. This is the first big warning sign I've seen from Moody's. Don't forget to subscribe to the channel. Please make sure you hit that uh bell notification. We're putting together another show with Rod pretty quickly now. it's probably going to be on this AI uh bubble and you know and and what we're starting to see shift.
So the story that uh Rod sent me yesterday out of the FT is entitled this. Meta faces higher borrowing costs and latest 12 billion data center financing. Black Rockck le deal meets investor anxiety over rising AI exposure. Bond investors are looking, it says, for significantly higher yields on the latest 12 billion metaback data center deal compared with the terms it secured just 9 months ago. This is as the markets price in higher risks around AI financing.
So this nearly 1 gawatt data center project is in El Paso, Texas. It's preparing to sell bonds through a special here we go special purpose vehicle SPV owned by Black Rockck and offering yields of 7 and a half%. But the latest borrowing costs and here's the big deal. The latest borrowing cost represents a risk premium of nearly 0.4 percentage points compared with Meta's previous Hyperion data center deal which raised 27 billion back in October. And for those of you saying, well4 of a percent, what's the big deal? Here we go.
Quote, "When you're selling tens of billions of dollars worth of bonds, even a 0.1 percentage point increase in costs would lead to tens of millions of additional interest expenses every single year." This is a credit investor focused on investment grade debt. Okay, take that times four and Meta is be paying a lot more money to do this deal that did the last one. The higher debt costs reflect lenders growing weariness of their increasing AI exposure following a borrowing spree led by big tech companies in recent months.
So listen to this. This is how they're structuring this guys and exactly what the CNBC uh Moody's warning is talking about. The new debt will be sold by a private vehicle named Soopia. I think it's uh after the fried named after the fried pastry popular in South America. Black Rockck affiliated funds will hold an 80% stake in the Texas project. What that means, Black Rockck affiliated funds, the investors in those funds are your pensions, your life insurance companies, your 401ks. We've discussed it at length on this channel. And then of course, Meta is going to own the remaining 20%. It's pretty much a carbon copy. what they tried to do or what they did do with Hyperion according to this uh Vivien Goslin an analyst at S&P.
But here we go. Borrowing from a project entity rather than buy the company itself has become increasingly popular as the tech group searched for ways to keep their balance sheets pristine while raising capital for the AI arms race. Last month, Anthropic, it says, borrowed 35 billion through financing packages backed by its leases of graphics processing units and a guarantee from Broadcom. If you think this all isn't interconnected, guys, I mean, uh, you you're you're not paying attention, then.
So, Papia's bond maturing in 2048 is secured by Meta's 20-year rent payment beginning in 2028, right? four years, excuse me, two years from now, if and when these centers even get finished. Meta has four renewal options every four years, but will have to pay it as a hefty termination fee if it exits the lease early, providing stronger lender protections according to S&P Global. But listen to this. Meta is shouldering the construction risks by paying any cost overruns beyond 105% of initial budget. So when these things get delayed, they can't get their power, they can't secure um you the labor to get these things built and the permissions. Meta is going to have to pay that overage. However, there's no direct pledge of physical assets. Meta could also terminate the lease, terminate the lease without any penalty if the site suffered from a severe casualty event that caused a project delay of more than 18 months, the rating agency noted in a report.
Okay, so they can medic can bail. And guess what? All the Black Rockck fund investors will get stuck holding the bag. We're talking about bag holders. Here we go again. S&P, and here's how it ties back to the rating. S&P assigned the notes an A+ rating, one notch below Meta's double A minus rating. From our standpoint, this is from this analyst. From our standpoint, this is a very robust structure. Okay? In in in plain English, that means it's rated higher than it should be. Okay?
Said Goslin Fitch and KBR assigned a double A minus rating to the deal, the same as Meta's corporate rating. Think about that. Of course, Black Rockck and Meta declined to comment, but they gave this they're giving this deal that is all fraught with all these say conditions, contingencies, the same rating as Meta's corporate rating. This is insane. I'll keep covering it. If you guys enjoy the content, leave me a like. Don't forget to subscribe to the channel, hit the bell notification, share this, please, with everybody. Leave me your thoughts and comments. Uh, with that being said, I'll talk to you all soon. Bye.