Amanda Lynam, Chief Credit Strategist in Global Investment Research, Goldman Sachs

Amanda Lynam (0:00)

If you just look at the CapEx figures from 2026 through 2030 for the group of hyperscalers, that CapEx estimate is upwards of $6 trillion.

So it is significant if you push that out through 2031, and then you also include what's already been invested in 2025, those numbers are even larger. And of course, here I'm just focusing on the hyperscaler ecosystem. But what we found in our work is that actually, hyperscalers are only 40% of total AI-related gross issuance. So the theme is actually much broader.

Dean Curnutt (0:39)

Hello, this is Dean Curnutt, and welcome to The Alpha Exchange, where we explore topics in financial markets associated with managing risk, generating return, and the deployment of capital in the alternative investment industry.

My guest today on The Alpha Exchange is Amanda Lynam. She is the Chief Credit Strategist in Global Investment Research at Goldman Sachs. Amanda, it's a pleasure to welcome you back to the podcast.

Amanda Lynam (1:09)

Thank you for having me back, Dean. That's great to see you.

Dean Curnutt (1:11)

It was great to run into you recently at Bloomberg, and you're a person that I've wanted to talk to because there's so much going on in your area of expertise around credit and all of the CapEx and AI build out. So we're going to have a lot to talk about. You were on the podcast. I just checked in October of 2023, and it's probably the case. You'll know it better than I do, but perhaps free cash flow for the hyperscalers probably peak the next year is my guess.

It's been on a one-way train lower as they issue so much debt. We're going to talk a lot about that. So let's get the conversation going. Give us the big picture as you frame out the credit landscape, whether it's with respect to the supply side, the demand side. We can talk about credit fundamentals. I'll just turn it to you just to give us the big picture, and then we can drill down into some of the specifics.

Amanda Lynam (2:10)

Sure. That sounds great. So at a high level, I would say we're generally constructive on corporate credit due to a few fundamental factors. One is the macroeconomic backdrop is probably good enough for credit at this point. So anywhere around trend or even slightly above trend growth is a pretty favorable backdrop for corporate credit, and that's essentially what we have. And presumably that is something that I think extends across a range of asset classes but is definitely a supportive factor for credit.

Second on the fundamental side, we have pretty solid fundamental metrics. Our team has done a lot of work identifying dispersion under the surface, but the fact remains is that whether you look at leverage or coverage, really, it's pretty solid from a fundamental credit perspective. So that's another really supportive anchor, fundamentally speaking, on credit. Then the technicals have been what I would characterize as significantly supportive for credit, specifically the yield-based backdrop for US and European credit specifically. We've had a couple of years now of elevated all-in yields, and it's really brought in a wave of buying from a very large and powerful cohort, specifically yield-based investors like insurers, pensions, and even foreign demand, which has remained on pace actually to exceed 2025's full year record. So when you put those things together, kind of good enough growth from a macroeconomic perspective, solid fundamentals as it relates to the corporate borrowers in our market, albeit with some dispersion, and then a very powerful technical that has incentivized yield-based investors to deploy.

It results in a backdrop where periods of spread-widening have not only been elusive, but they've been short-lived. And that's something that a range of investors and allocators have been navigating, because while we often hear that there's a fair amount of capital on the sidelines to deploy, the opportunities to deploy that at widespread levels have been episodic. Now, that is the backdrop. Our forecasts, however, do call for some modest spread-widening, but I think it's important to frame that in the context of the overall historical pattern. And even the modest widening that we expect is not at all wide by historical standards. So when I have to think about the risks to our view, having outlined what I just went through, the risks to our view are for modestly wider spreads. But again, we're still pretty constructive.

I think the key message that I would highlight, away from the immediate discussion on AI-related supply, the key risk that I would frame is that right now, the rates backdrop has been a tailwind for credit. And what we are watching closely is that, is there a tipping point where the rates volatility in the rates market increases, such that rates become a headwind for credit? We're not seeing that, but that's the one thing that I would put on my radar in terms of things to watch, and what is an otherwise constructive backdrop for credit?