Is There Really Carnage in Hyperscaler Credit?

CDS are derivative swap agreements that serve as insurance for bondholders, protecting against a default. The cost to contain this risk has risen by almost 50%. As a result, the odds of a default in any of the five names over the next five years have risen from 8.6% to 11.8%.

Background

Before assessing the bearish narrative, it's important to ask why the fear of financial difficulties is increasing.

The primary answer is the massive funding the hyperscalers require to build out data centers and the poor visibility into the timing and amount of future revenue from those investments.

The amount of capital Amazon, Meta, Google, Microsoft, and Oracle require is rising rapidly. The need to raise both debt and equity capital is relatively new because the companies are shifting from cash flow–positive to cash flow–negative positions. Their profits are no longer large enough to cover their AI-related investments.

Currently, the five hyperscalers have combined 2026 capital budgets of roughly $725 billion to $770 billion — up from less than $100 billion in 2021. Alliance Bernstein estimates that spending from the group could reach nearly $1.6 trillion by 2030.

There has been a sharp decline in free cash flow for the hyperscalers and a commensurate surge from semiconductor companies that are on the receiving end of their capital expenditures.

Is the Bond Market Concerned?

Growing worries about rising debt issuance are reflected in higher CDS spreads. While CDS spreads are an important gauge of creditworthiness, it's important to recognize that CDS trading can be illiquid and volatile, which causes unjustified comfort or concern.

Credit spreads are a more robust way to track credit conditions for a company or the broader market. A credit spread is the difference between a bond yield or a corporate index yield and a comparable-maturity Treasury bond. A rising spread indicates investors are demanding an additional yield premium to compensate for increased default risk.

The two charts below help us assess whether the bond market is truly pricing in higher default risk.

The first graph shows the yields of the five hyperscalers alongside U.S. Treasury yields. The second graph answers the question: Is the bond market concerned? It charts the hyperscalers' credit spreads as compared to the credit spread of the corporate bond BOA ICE AA-rated Index.

Excluding Oracle, the four other hyperscaler credit spreads have been relatively flat and, since the start of 2025, have been at or below the index representing all AA-rated bonds.

Based on the data, the fear being spread is an Oracle story — not an indictment of Google, Microsoft, Meta, or Amazon.

Oracle

Oracle's five-year CDS spread has risen quickly, from below 50 basis points in mid-2025 to 200 basis points today.

On the cash-bond side, an Oracle bond maturing in February 2031 trades at a yield of 6.23%, about 180 bps above the five-year Treasury. Currently, Oracle has a BBB- rating from S&P Global. Based on the table below from SimpleVisor, Oracle yields are much higher than BBB-rated bonds and in line with junk-rated BB bonds.

Oracle's 2026 capital expenditure was $55.7 billion. The company has negative free cash flow of $23.7 billion and total debt near $130 billion. Its debt-to-equity ratio is near 4x. Its key debt ratio is also well above the other hyperscalers:

• Microsoft .30x
• Meta .36x
• Google .18x
• Amazon .51x

Amazon, Microsoft, Alphabet, and Meta

Unlike Oracle, credit ratings for this group remain firmly in the high investment-grade tier:

• Microsoft is AAA (S&P) and Aaa (Moody's), one of only two U.S. public companies at the AAA rung.
• Amazon is AA (S&P), AA- (Fitch), and A1 (Moody's).
• Google is rated AA+ (S&P) and Aa2 (Moody's).
• Meta was recently upgraded to Aa3 (Moody's) and holds AA- at S&P.

The high credit ratings are not surprising given the low debt-to-equity ratios. According to Credit Sights data, the ratios are well below the approximate .80x average for S&P 500 companies in aggregate.

The credit profile of these four hyperscalers is not a concern today. However, investors should not get complacent. Rapidly rising debt without commensurate income could change the hyperscalers’ credit standings rapidly.

Summary

“Carnage” and “exploding” are very misleading descriptors of what is happening to hyperscaler credit spreads. Yes, the basket of CDS spreads is certainly moving upward, but it is not evenly distributed. Oracle's CDS spreads have moved by multiples, while the other four hyperscalers' CDS spreads have increased by a much more subdued amount, and from unusually tight initial levels.

At face value, the first graph greatly overstates the risks facing Microsoft, Amazon, Alphabet, and Meta bondholders.

What it really highlights is an Oracle problem. Driven by a balance sheet stretched by debt-fueled AI infrastructure spending and a credit rating teetering a notch above junk, investors are rightfully concerned. They are pricing Oracle bonds as if they have already been downgraded into junk territory.

The question investors should be asking isn't whether Oracle is an outlier because it clearly is. The question is whether Oracle is a preview of what happens to credit markets more broadly if AI capital spending keeps outrunning AI revenue.

Read more by Michael Lebowitz:

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Michael Lebowitz is a portfolio manager with RIA Advisors and author for Real Investment Advice. For more information, contact him at [email protected] or 301.466.1204.

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