Trouble in paradAIse?

We’re waking up this morning with renewed concerns about the well being of our AI industry, in this case from the point of view of credit. Open AI is the epicenter of the worries, and Oracle, NVDA, and the BDCs are starting to revive the shock waves. Oracle is trying to raise capital, through equity and debt, to continue funding its AI bet, which has cost them dearly in terms of their CDS and their stock price. It already has a negative outlook on its rating by S&P and if things get worse, ot risks its investment grade rating. On the bottom chart below, you can see how BB spreads are ticking up, not in a worrisome way, mostly because most of the public debt related to AI is investment grade, but perhaps the HY sector is preparing the umbrella for some falling angels rain. In the top chart below, you can see some of the Business Development Companies (BDCs), and you can see how the market is differentiating between the ones with exposure to the sector, and more aggressive bets, and those that don’t. The difference in some cases is more than 40% in pweformnacejver the last 12 months. Their yields are very juice, and yet, they don’t seem very attractive for investors, as they smell trouble. It’s interesting to add to the mix th recent comments from the future Fed chairman (Kevin Warsh), where he foresees a smaller balance sheet for the Fed, and less intervention in the market, which will allow him to cut rates to please the president. What will happen to liquidity of the Fed balance sheet continues to shrink? And how low will interest rates would have to go to offset balance sheet reduction? Will that be net beneficial for BDCs and the credit markets?

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