U.S. Tech Companies’ Borrowing Affects Europe

Europe’s bond markets face a new challenge as US tech companies increasingly tap European investors to fund AI spending, boosting corporate debt supply and potentially raising borrowing costs for other firms and governments.

Although tech-related borrowing in Europe lags the US, investors say it is set to open the way for a bigger wave of issuance in the euro, sterling and Swiss franc markets in the coming months.

Alphabet (GOOGL.O) on Monday launched its second euro-denominated bond sale this year, after a 9 billion euro ($10 billion) issue in May.

Investors expect other so-called hyperscalers, or Big Tech companies, including Meta (META.O), Amazon (AMZN.O) and Microsoft (MSFT.O), to step up borrowing outside the United States as they fund large-scale AI infrastructure investment.

“Europe has lagged the US in tech issuance, but activity is accelerating,” said Marion Le Morhedec, chief investment officer for fixed income at Fidelity International.

She estimates that 40 billion to 60 billion euros of issuance is planned.

Borrowing in foreign currencies allows companies to benefit from relatively lower borrowing costs in markets such as Europe while hedging the currency risk of their global assets.

Europe’s deep capital markets offer an attractive source of funding. But while more issuance expands the pool of high-grade corporate debt available to investors, it could also raise borrowing costs for European companies and governments that are already grappling with fiscal and inflation concerns.

US tech fundraising has outpaced Europe’s supply

Funds raised through US tech bond issuance are up 80% since the start of the year

EUROPEAN TECH DEBT ISSUANCE HAS PICKED UP

US markets have raised more than $250 billion from tech-related debt issuance this year, 81% more than in the same period last year. According to LSEG data, total issuance in Europe is up about 5% year on year at $39.3 billion.

Despite investor worries over whether Big Tech’s huge AI investments will pay off quickly enough, which triggered a sell-off that wiped more than $2 trillion off the market value of the tech-heavy Nasdaq (IXIC) last month, analysts and investors expect bond issuance to remain strong.

BNP Paribas expects net supply of euro-denominated investment-grade corporate bonds to rise 83% in 2027 to 192 billion euros ($214 billion), up from 105 billion euros this year.

Giulio Baratta, global co-head of investment-grade financing at BNP Paribas, said offshore bond issuance by US companies (known as “reverse Yankee” in reference to Yankee bonds) will account for roughly 80 billion to 90 billion euros of total debt supply for 2027, with hyperscalers making up the bulk of it.

“If any of these hyperscalers come to market with a multi-billion-dollar deal executed in a day, it’s undeniable that everyone knows about it and everyone needs to pay attention,” said Baratta, who helped arrange Alphabet’s May euro bond sale.

JUMBO OFFERINGS COULD TEST DEMAND

The debt flow could widen investment-grade credit spreads, as hyperscalers compete for investor demand with other highly rated borrowers in sectors such as utilities, telecoms and carmakers.

Asset swap spreads in the ICE BofA Euro Investment Grade index widened by 11 basis points last month, suggesting investors are demanding more compensation to hold corporate bonds relative to interest rate swaps.

Analysts say that as supply grows, issuers may have to offer price concessions to secure sufficient demand, which could raise funding costs for other companies.

Investors in European markets also have little experience absorbing the multi-tranche deals that are routine in the US. Jonathan Owen, a member of the multi-sector bond portfolio management team at TwentyFour Asset Management, said such deals could temporarily widen European investment-grade credit spreads.

SOME EUROPEAN ISSUERS SHIFT TO SHORTER MATURITIES

Strong investor demand has so far absorbed the supply. But analysts said a series of jumbo deals of 10 billion to 20 billion euros could test that appetite, especially if several issuers come to market at the same time.

According to investors, some European companies are already responding to long-term yield volatility and higher supply expectations by favoring shorter maturities.

“We definitely see corporate, non-hyperscaler corporate issuers staying away from long-dated debt,” said Christian Hantel, a portfolio manager at Vontobel, without naming specific companies.

“It used to be a normal 10-year bond, now they’re moving to five to seven years.”

The additional issuance could further weigh on government bond markets, which are under pressure from investor concerns over fiscal and inflation risks.

European Central Bank President Christine Lagarde said last week that hyperscaler debt issuance has contributed to higher sovereign bond yields.

“People are paying a lot of attention to the amount of AI supply we’re getting and what it means for government bonds,” Owen said. He added that hyperscaler debt offers high credit quality and typically yields more than government bonds.

(1 dollar = 0.8948 euros)