TLDR
- Alphabet issued a rare 100-year sterling bond worth £1 billion as part of a $20 billion multi-currency borrowing drive to fund AI infrastructure and data centers.
- The century bond attracted nearly 10 times oversubscription from pension funds and insurers, with the coupon set at 120 basis points above 10-year gilts.
- Market strategists warn the deal signals late-cycle frothiness in credit markets as tech giants’ total debt issuance could reach $3 trillion over five years.
- Alphabet’s capex spending is expected to hit $185 billion in 2026 as it competes with Oracle, Amazon, and Microsoft in the AI infrastructure race.
- Credit spreads are at historically tight levels, similar to the late 1990s when century bonds preceded market corrections, raising concerns about overlending to tech companies.
Alphabet closed at $310.96 on Wednesday, down 2.39%, as the company announced a historic bond issuance that has market strategists questioning whether credit markets are getting too comfortable.
The Google owner issued a rare 100-year sterling bond on Tuesday as part of a massive $20 billion borrowing drive. The century bond attracted almost 10 times the orders for the £1 billion ($1.37 billion) sale.
The multi-tranche offering spans dollars, euros, and sterling. It also includes Alphabet’s first bond issuance in Swiss francs.
Century bonds remain extremely rare in corporate markets. They’re more commonly associated with governments than companies like Alphabet.
The 100-year bond’s coupon reached 120 basis points above 10-year gilts. Demand came primarily from pension funds and insurers seeking to match long-term liabilities.
Alphabet joins a small group of sterling-denominated century bond issuers. The list includes the University of Oxford, the Wellcome Trust, and the government of Mexico.
Tech Giants Race to Fund AI Infrastructure
Bill Blain, CEO of Wind Shift Capital, called the debt levels now being raised “off-the-historical scale.” Alphabet said last week its capex spending is expected to hit $185 billion this year.
Oracle, Amazon, and Microsoft are also scaling up infrastructure spending. Tech giants’ total debt issuance is predicted to reach $3 trillion over five years.
“I give them full credit for taking advantage of the opportunity that existed to sell a moderately high coupon 100-year bond,” Blain told CNBC. “They clearly identified demand that this was what U.K. insurance and pension funds wanted to cover their liabilities.”
But Blain warned the deal offers proof of market froth around AI. “I think the fact that a 100-year bond comes out, you can’t get much more frothy than that,” he said.
Credit spreads are at historically tight levels. The spread of corporate yields over Treasurys hit the lowest since just after Coca-Cola’s 1998 century bond issuance.
Century bonds typically emerge when money is easy. The first wave came in the mid to late 1990s before Long-Term Capital Management imploded.
The second wave arrived during zero interest rates. Austria issued zero-coupon 100-year bonds in 2020, while Argentina defaulted on its century bonds after just three years.
Credit Quality Concerns Mount
Alphabet sits on $126 billion of cash and marketable securities. The company borrows less than half that amount and maintains an AA+ credit rating.
However, bondholders face exposure as Alphabet races to spend on AI infrastructure. The company’s Gemini chatbot competes with OpenAI’s ChatGPT, Anthropic’s Claude, and Chinese developers.
The business model of AI remains uncertain. If businesses prefer low-cost open-source AI models, current leaders might suffer.
There’s also danger that AI could replace traditional web search. That would undermine Alphabet’s core cash engine.
Nachu Chockalingam, head of London credit at Federated Hermes, said Alphabet is diversifying funding sources. “They are looking to tap into insurance and pension demand to avoid over-saturating the USD market,” he said.
The duration of Alphabet’s 100-year bond is just under 17 years. That’s the time it takes for a bond to pay back the original investment.
The final principal payment in 100 years represents just 0.28% of the present value of all payments. The bonds should behave like conventional 40-year bonds available from Oracle, Cisco Systems, Intel, and Apple.
Alphabet’s oversubscribed issue shows investors are happy to finance AI spending for now. But as the industry borrows more, it may hit a limit and lift yields across the tech sector.
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