Corporate bonds issued by cloud computing giants driving the artificial intelligence boom are becoming increasingly risky, private equity firm Apollo Global Management warned on Wednesday.
The price of risk insurance contracts known as credit default swaps (CDS) on bonds issued by hyperscalers is rising, but that’s not because banks are hedging more risk as bond issuance increases, Thorsten Slok, Apollo’s chief economist, wrote in a note Wednesday.
“What the market is re-pricing is hyperscaler credit fundamentals, a debt-financed AI capex cycle with increased leverage, negative free cash flow, and uncertain recovery of depreciating assets,” Throck wrote.
If dealers’ hedging of new bonds is responsible for the rise in risk insurance prices, the widening will be felt by the banks that issue those bonds. But that’s not what’s happening.
Widening disparity
According to Slok’s research, the gap between hyperscalers’ CDS and banks’ CDS has widened from about 0 to about 60 basis points since October 2025, suggesting that hyperscalers’ credit risk has increased considerably.
The memo from Apollo follows warnings from leaders at the frontier of large-scale language models over the weekend that they want to slow the rate of product progress due to safety concerns. This could have financial implications for cloud computing providers running LLMs.
Many on Wall Street believe frontier model companies are looking to Washington for regulations that can protect them from competition from startups and protect them from legal liability for the actions of self-governing agents.
“What they’re really after is dealing with communications laws that protect social media people,” said Dan Alpert, founding managing partner at Westwood Capital. “They want laws to ‘regulate’ them, but all you can really do is exempt them.”
According to the National Association of Attorneys General, Section 230 of the Communications Act of 1996 provides that “Internet platforms are not treated as publishers of third-party content” and that “platforms are not responsible for content posted by users.”
“Banks… have built fortress balance sheets… have built up significant capital buffers and are now much more highly diversified in their exposures than they were during the mortgage crisis,” Alpert said. “If you look at it from the perspective of how the market views credit risk, there may be an answer there.”
It’s too early to worry
Technology investors argue that hyperscalers’ margins are increasing, justifying debt issuance, and that it’s too early to worry about widening CDS spreads.
“(Hyperscalers) haven’t really added enough capacity going into 2027 and 2028 to know what this is going to be like,” said Paul Meeks, head of technology research at Freedom Capital Markets. “We’re starting to see margins starting to turn positive, and if this continues, there will be less concern.”
alphabet According to FactSet, the company’s future debt-to-equity ratio is 13% and its future free cash flow is negative $25.7 billion.
Amazon The debt-to-equity ratio is 23% and free cash flow is negative $30 billion. meta platform The company has a debt-to-equity ratio of 34% and free cash flow of negative $25.7 billion. microsoft The company has a debt-to-equity ratio of 7.34% and positive free cash flow of $33.4 billion.
Economists are also keeping an eye on hyperscalers’ credit conditions after Apollo issued a warning on Wednesday about credit default swaps.
“The problem here is that CDS investors, who are the most sophisticated investors anywhere (perhaps wrong, but definitely in the weeds), are putting far more risk on the debt of the world’s most profitable companies,” said Dean Baker, founder of the Center for Economic Policy Research. “They clearly think there’s a significant risk that AI companies won’t deliver on their promises.”
