AI Borrowing Creates a New Credit Playbook

**Vishy Tirupattur** (0:00)
Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Ex-Income Strategist. Today, the critical question behind the AI-driven CAPEX cycle that is front and center for markets year to date. How is the credit market financing of this ecosystem evolving?
It's Wednesday, June 3rd at 2 p.m. in New York.
When we first discussed the role of credit markets in financing the AI and the data center build out around the middle of last year, the direction of travel was clear. Realizing the transformative potential of AI requires unprecedented levels of capex. What has really surprised us since is the scale and speed of that spending, both of which have exceeded our expectations by a wide margin. The upward revision in capex expectation has been dramatic. A year ago, we projected the combined capex of the five large hyperscalers at roughly 450 billion in both 2026 and 2027
After the first quarter earnings reports, Morgan Stanley Internet Equity Analyst led by Brian Nowak, now expect hyperscaler capex of roughly 800 billion in 2026 and 1.2 trillion in 2027
One data point really captures the surge in the underlying demand for compute. According to OpenRouter, the global weekly token usage, which is a key proxy for compute, has risen by roughly 350 percent since early January, increasing from about 6 trillion tokens to 28 trillion tokens. Credit channels for financing this capex have normally been broader and deeper than we anticipated, spanning public and private markets, but have been remarkable in the structural innovation that is blurring the lines between public and private markets. Over 200 billion of public AI-related issuance across different credit channels has happened just in the first 5 months of this year. We had previously assumed unsecured issuance would be limited by the scale of the largest non-financial issuers confined to investment-grade credit only and largely US dollar denominated. Instead, some hyperscaler issuance has now far exceeded even the largest telecom names. Funding has expanded well beyond dollars into Euros, Pound Sterling, Swiss francs, Japanese yen and Canadian dollar markets. The issuer base has also broadened to include data center REITs and neo-clouds, particularly in the high-yield market. The scope of financing has also widened beyond the data center shelves themselves. GPU financing, which we assumed would be funded entirely through equity capital, has begun to migrate into credit markets. Funding is now coming through broadly syndicated loan market and asset-based financing, with ABS structure not far behind. Structural innovation illustrates how rapidly the credit ecosystem is adapting to the complexities of demands of AI-driven capex. Financings that combine elements of project finance, taunching, residual-value guarantees, along with high-yield issuance backed by hyperscaler-guaranteed leases, these are innovations that we have never seen before. These structures have expanded the investor base, reduced the funding frictions, and further blurred traditional boundaries between both corporate and project finance and public and private credit markets. At the same time, physical, operational and political constraints are beginning to shape the pace and the composition of the AI infrastructure build-out and, by extension, the demand for financing. Grid access, power generation equipment, skilled labor, and permitting delays are emerging as significant constraints. These are compounded by political and regulatory frictions at the local, national, and international level. As power availability becomes a gating factor, the AI build-out is likely to pull energy and infrastructure financing more tightly into the orbit of AI infrastructure financing. The clear takeaway is this. The CAPEX requirements underpinning AI infrastructure are expanding exponentially, and with them, the role of credit markets in financing this build-out.
Along the way, there will be winners and losers, periods of adjustment, and a range of physical, financial, and political constraints that shape outcomes on the margin. But the broader trajectory is certain. The scale, duration, and strategic importance of AI infrastructure investments means that the financing of this will remain a defining theme for credit markets and credit investors for years to come.
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**SPEAKER_2** (4:50)
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