Corporate debt issued by the giant cloud computing players powering the artificial intelligence boom is getting riskier, private equity firm Apollo Global Management warned on Wednesday.
Risk insurance contracts, known as credit default swaps (CDS), for bonds issued by hyperscalers are getting pricier, and it's not because banks are hedging more of their bets as bond issuance climbs, Apollo chief economist Torsten Slok wrote in a Wednesday note.
"What the market is repricing is hyperscaler credit fundamentals, namely a debt-financed AI capex cycle with rising leverage, negative free cash flow and uncertain payback on depreciating assets," Slok wrote.
If dealer hedging of new bonds were responsible for the rise in risk insurance prices, that widening would show up in the issuers of those bonds – the banks. But that's not what's happening.
Widening gap
The gap between hyperscaler CDS and bank CDS has widened to around 60 basis points from roughly 0 since October of 2025, implying that hyperscaler credit risk is increasing on its own terms, Slok's research shows.
The note from Apollo follows warnings from the leaders of frontier, large language models (LLMs) over the weekend, who said they want to slow the rate of advancements of their products due to safety concerns. That could have financial consequences for the cloud computing providers that run the LLMs.
Many folks on Wall Street think the frontier model companies are seeking regulation from Washington that can protect them from competition from startups, and guard against legal liability for the actions of autonomous agents.
"What I believe they're really shooting for is the Communications Act treatment that protected the social media guys," Dan Alpert, founding managing partner of Westwood Capital, said. "They want some legislation that 'regulates' them, but what it really does is absolves them."
Section 230 of the Communications Act of 1996 specifies "internet platforms would not be treated as publishers of third-party content" and that "platforms would not be held liable for user-posted content," according to the National Association of Attorneys General.
"The banks have built up … fortress balance sheets … They have built up a significant equity buffer and they are now much more highly diversified in their exposure than they were during the mortgage crisis," Alpert said. "That is where the answer may lie in terms of the way the market is looking at the credit risk."
Too soon to worry
Technology investors say margins for the hyperscalers are increasing, justifying the debt issuance, and that it's too soon to worry about the widening CDS spreads.
"[Hyperscalers] don't really add their capacity in a significant enough way into 2027 and 2028 to know how this is going to turn out," Paul Meeks, head of technology research at Freedom Capital Markets, said. "We're starting to see a turn to the positive in their margins, and if we continue to see [this], there will be less concerns."
Alphabet has a forward debt-to-equity ratio of 13% and forward free cash flow of negative $25.7 billion, according to FactSet.
Amazon has debt-to-equity of 23% and free cash flow of negative $30 billion. Meta Platforms has debt-to equity of 34% and free cash flow of negative $25.7 billion. Microsoft has debt-to-equity of 7.34% and positive free cash flow of $33.4 billion.
Economists are also keeping a close eye on the credit conditions of the hyperscalers in light of the Wednesday warning on credit default swaps from Apollo.
"The issue here is that CDS investors, who are the most sophisticated investors anywhere (possibly wrong, but definitely in the weeds), are attaching far greater risk to the debt of the most profitable companies in the world," Dean Baker, founder of the Center for Economic and Policy Research, said. "They obviously think there is a substantial risk that the AI companies cannot make good on their commitments."
