After a round of fluctuations, market concerns regarding artificial intelligence-related debt have eased. However, more tests for the AI debt are yet to come.

Oracle will hold an Investor Day on Wednesday. Meanwhile, the hyperscale cloud providers Alphabet and Amazon have scheduled to release their quarterly earnings after the market closes on Wednesday and Thursday, respectively.

The credit market has always been vigilant regarding the surge in AI debt, although recent concerns have eased somewhat. On Monday, Meta Platforms announced a $95 billion stock issuance plan, which helped to reduce the spread on its credit default swaps ( CDS ). Previously, after the company reported negative free cash flow for the third quarter last week, its CDS spread had risen temporarily. The CDS spreads of other companies also increased, but have since declined.

Nuveen, the head of the investment-grade corporate sector team, Richard Cheng stated that investors had originally expected Meta to launch a large-scale bond transaction shortly after the release of the financial report. However, this news was not announced, which relieved the market.

He said, 'Simply by not carrying out this bond transaction itself, it directly contributed to the narrowing of the spread related to AI.'

The credit spread refers to the difference in yield between corporate bonds and U.S. Treasury bonds with similar maturities. A narrowing of the spread indicates that investors have increased confidence in the bond issuers.

"Concerns are being exaggerated"

CNBC the author, Freedom Capital Markets the head of scientific research, and Paul Meeks stated that the market performance over the past few days indicates that investors are beginning to realize that "credit concerns may have been exaggerated."

He said, "I expect that as companies start to release their quarterly results over the coming weeks, this improvement in sentiment—perhaps not excellent, but certainly better—may continue."

However, due to the surge in debt issuance and the overall negative free cash flow in the AI sector, the CDS yield spread has remained at a wider level over the past year. Taking Meta as an example, its CDS yield spread has increased by 177% this year, while Amazon's yield spread has increased by 129%.

Bond yields also remain at a high level.

CreditSights Analyst Jordan Chalfin stated: "This is not necessarily a fundamental issue. To be more precise, I believe that 80% of it is driven by technical factors and market sentiment."

Financial reports become the focus

As Alphabet and Amazon update their capital expenditure plans and free cash flow forecasts, tech bonds will face significant challenges ahead. Microsoft's financial report will also be released on Wednesday, but the company has not yet issued bonds to cover its AI expenditures.

Alphabet and Amazon both recorded negative free cash flows in the second quarter, and analysts expect this trend to continue.

In line with the expectations consistent with FactSet, analysts predict that Alphabet will have a negative free cash flow of $2.3 billion in the third quarter, with capital expenditures amounting to $55.2 billion. The market expects Amazon's free cash flow to be negative $9.9 billion, corresponding to capital expenditures of $58.7 billion.

In a report in August, Standard & Poor's Global Ratings estimated that these hyperscalable cloud providers will experience negative free operating cash flows in 2026 and 2027.

What's more crucial is the outlook they provide. "The only concern in the minds of investors is actually what the trajectory of capital expenditure will be in the entire field of hyperscale cloud providers."

Meeks believes that high capital expenditures are a sign of strong demand from AI. He said that these large-scale cloud providers "have concluded, based on all the evidence they possess – and they have more evidence than you and I do – that such expenditures are not only worthwhile, but necessary."

Chalfin predicts that these ultra-large cloud vendors will not announce large-scale new debt issuances around their financial reports. In contrast, Oracle's updates may be more crucial for the credit market. According to Standard & Poor's data, the company has issued $117 billion in long-term debt and currently maintains an investment-grade credit rating BBB-1, which is the lowest level of investment grade above junk grade.

He said, "It is the most important investment-grade technology credit asset, as it faces greater pressure compared to those companies with an A rating. Although it is investment-grade, its trading performance is more akin to high-yield credit, so investors indeed have many concerns about it."

Off-balance-sheet debt

AI There is another complex factor in the debt story: the balance sheet does not reveal the full picture. In a report in September, S&P Global stated that these companies are financing data centers and chips through complex off-balance-sheet arrangements, and the related disclosures are not entirely transparent.

Spencer Stover, head of Standard & Poor's Global Ratings for the digital infrastructure industry, stated on Monday in the program "Squawk on the Street" on CNBC that: "They are making certain commitments, such as commitments to data center leasing or chip procurement, and these may not necessarily be considered debt."

He added that Standard & Poor's is trying to give the market more visibility into these commitments, "in order to present more fully what types of obligations they are actually undertaking."

Apart from Oracle, the credit ratings of the largest cloud service providers are firmly above the A level – this reflects their wide and diverse sources of revenue, sufficient interest coverage capabilities, and the room to further leverage their finances when needed.

The Cheng of Nuveen is not worried at all. He pointed out that although there have indeed been some revaluations in credit pricing, there is no credit crisis.

When talking about these largest hyperscale cloud providers, he said, "They still possess very excellent credit profiles, strong cash generation capabilities, and liquidity."

Cheng also indicates: 'What the market is truly concerned about at present is not the quality of credit, but rather the trajectory of capital expenditure demand, and the supply of debt required to finance it. Both factors point towards the same outcome – namely, an increase.'