CAPEX vs FCF

The AI race is going to change the shape of the corporate bond market. Please take a look at the chart below: it’s estimated (by GS) that the hyperscalers combined CAPEX needs for fiscal 2027 will be almost $1Tn. Not cumulative, only for 2027. To give you context, the current combined market cap of the companies in the picture is roughly $12Tn. In other words, they are betting 8% of their market cap on AI data centers and infrastructure, with a less than clear ROIC (Return on Investment Capital). The combined Free Cash Flow of these companies will not be enough to chip in, which means they will issue debt. They are already issuing debt, but they will issue more. Since they have excellent CFOs, they will probably issue long term debt, knowing that Treasuries yield will likely go up, or convertibles, which allow them to pay a lower coupon, and convert into expensive shares should the convertibility kicks in. Since the issuance will be massive (if the estimates become true), the supply of paper will change the market shape and could push spreads higher. On top of that the US government needs to issue more debt and swap short T-bills for long term bonds. Perhaps we need a short term scenario we’re long term yields go down (recession?) to issue and swap massive amounts of debt, and then let the price (and yield) discovery work it out. Not a great set up for fixed income investors.

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