S&P Global flags potentially hidden AI debt at hyperscalers as AI spending surges

ETMarkets.com

The warning came from Mark Habib, S&P Global’s Head for Digital Infrastructure, who said there was no need to change the agency’s ratings for now. However, he pointed to complex financing arrangements that could leave hyperscalers exposed to debt linked to data centre projects or smaller AI companies without those obligations being immediately visible on their balance sheets.

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“It is safe to assume that there is more (debt) out there that we are not seeing,” Habib said during a roundtable in London, according to Reuters.

“If it's not reported, then it's not part of the disclosure by the hyperscalers. Also, if we are not rating the transactions where this liability may accrue, then the fact of the matter is that we might not have the visibility.”

AI buildout creates new financing risks

The concern comes as borrowing by AI infrastructure providers and so called neocloud companies has come under increasing stress in recent weeks. Nvidia backed CoreWeave is among the companies whose debt has faced pressure as investors assess whether the aggressive borrowing needed to fund the AI buildout can generate sufficient returns.

S&P expects the six biggest US hyperscalers, Amazon, Microsoft, Alphabet, Oracle, Meta and SpaceX, to spend more than $7 trillion on data centres and other AI related capital expenditure between 2025 and 2030.

The spending spree is also expected to keep their free cash flow negative until at least next year, increasing the importance of how quickly AI investments translate into revenue and profits.

Habib said S&P did not have an estimate for how much additional debt such interconnected financing structures could ultimately add to hyperscalers’ balance sheets. The agency was instead trying to take a “holistic” view of the risks, he said.

Profitability remains the bigger rating test

For now, S&P’s biggest concern for hyperscaler ratings remained whether the profits expected from their massive AI investments actually materialise.

S&P downgraded Oracle to BBB, the lowest rung of investment grade, in July, citing concerns over its AI spending and what it described as an “uncertain path to profitability”.

Habib was also asked whether the recent selloff in bonds linked to the AI buildout suggested investors viewed the debt as riskier than current ratings imply.

“For now, we don't have the view that there is a major disconnect that needs to force our ratings to change at this point,” he said, adding that S&P’s ratings were designed to take a longer term view.

That stance could change if the scale of AI spending begins to look unsustainable.

“And that could come from a variety of drivers,” Habib said. “Further increases in the investments (by AI firms), or a view that the revenue rate of competition is getting too intense.”