Shadow borrowing

A recent Nikkei investigation has put a spotlight on a massive but largely overlooked aspect of the AI infrastructure boom: Alphabet, Microsoft, Amazon, Meta, and Oracle collectively hold approximately $1.65 trillion in off-balance-sheet obligations. That’s more than their combined $1.35 trillion in reported on-balance-sheet debt. How can that be possible? Well, because under US GAAP (primarily ASC 842 for leases), companies are not required to recognize certain lease obligations on the balance sheet until the underlying facilities or assets “go live” or the lease commences. Future lease commitments for data centers that have been contracted but not yet operational fall into this category; they’re disclosed in footnotes but don’t hit the liability line until services begin. Is that legal? Yes. Is it a fair representation of their books? Arguably not. It’s just too meaningful to simply disclose it on a footnote. What’s the risk? If AI-driven demand meets or exceeds expectations, these investments pay off handsomely. If growth disappoints, the hit from bringing these onto the books (or impairments) could be material. And we’re talking about hundreds of billions, not pennies. Several of these companies report earnings over the next 2 weeks, and these items will come up in the earnings calls, where CFOs will be questioned about this debt. Analysts will ammend their research notes and it will be released to the public. Will it matter?

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