Less than a week after its third-quarter performance plummeted and its stock price tumbled to a record low, Alphabet ventured into the euro bond market to launch a new round of financing, directly testing whether investors' confidence in the massive capital expenditures for artificial intelligence remains firm.
According to Bloomberg, which cited people familiar with the matter, Alphabet opened a bookbuilding for the issuance of seven tranches of euro bonds with maturities ranging from 2 years to 19 years on Monday, and underwriting banks are expected to complete the pricing later in the day. This issuance comes just a few days after Alphabet announced its third-quarter results last week, which disappointed the market. At that time, the company's daily market value evaporated by over $500 billion, and credit spreads in the tech sector widened accordingly.
This financing will further bolster Alphabet's annual capital expenditure plan, which amounts to $205 billion. However, whether it can complete the issuance at a reasonable cost will become an important indicator for the market to assess investors' confidence in AI's infrastructure narrative. At the same time, technology bonds issued during the same period are generally facing pressures of weakened demand and wider pricing ranges.
A sharp decline in performance triggers a chain reaction in the credit market
Alphabet's third-quarter revenue, announced last week, fell short of market expectations. Consequently, concerns about whether investments in AI could translate into tangible returns surged, and there were also voices suggesting that AI posed a potential threat to its core search business. As a result, the company's stock price hit a record for the largest single-day market value loss, amounting to 500 billion US dollars, which also affected the credit spreads across the entire tech sector.
The reaction in the credit default swap market was particularly significant. Last Friday, the cost of default protection for Alphabet debt soared by 6.4 basis points in a single day, recording the largest absolute increase on a single-day basis and reaching a historical high of around 91 basis points.
According to informed sources, this euro bond issuance has seven maturities ranging from 2 years to 19 years. The initial pricing for the 2-year fixed-rate tier is based on the interbank swap rate (mid-swaps) plus about 60 basis points, while the longest-term 19-year tier is quoted at (mid-swaps) plus a range of 205 to 210 basis points. The underwriting institutions include Barclays, BNP Paribas, and Deutsche Bank.
In May this year, Alphabet raised 9 billion euros (approximately 10 billion US dollars) in the euro bond market with a six-tranche structure. With this latest move, the outside world will closely monitor the final pricing and the scale of demand to assess the actual impact of this performance on the company's financing conditions.
Tech giant AI's arms race shows no sign of slowing down
Despite market sentiment becoming more cautious, there are no signs of a reduction in the capital expenditure commitments from tech giants. Alphabet has maintained its highest annual capital expenditure guidance of $205 billion. Together with Meta Platforms, Microsoft, Amazon, and Oracle, the combined expenditure commitments of these five companies over the next few years have exceeded $3 trillion.
The trend of technology companies continuously financing for AI through the debt market continues. Last week, Microsoft completed a $25 billion bond issuance, which was its first bond issuance in the U.S. investment-grade market since 2017. This ten-tranche bond issue received more than four times the amount of oversubscriptions. At that time, Microsoft's third-quarter performance exceeded Wall Street's expectations, and market sentiment was relatively favorable.
In contrast, the market environment faced by Alphabet in this issuance is significantly more complex. Recently, the issuance of technology bonds has generally encountered weak demand and wider pricing margins. Whether this financing can be successfully implemented will become an important test of the market's confidence in the narrative of AI.
