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- [00:01]
IBM Representative
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- [00:33]
Amanda Lyneham
Bloomberg Audio Studios Podcasts, Radio news
- [00:38]
Tom Keene
Driving all the credit. Amanda Lyneham at Goldman Sachs is in studio with us. It could be a one hour conversation. We're going to do it in seven minutes. Here. Your note finally out. It's like a Marty Fritz and one on one note. It's like oops, defaults, credit, left tail fold in private credit. In the angst over the weekend on private credit, public credit, private credit, is there a left tail risk?
- [01:03]
Amanda Lyneham
Good morning. Thank you for having me. So taking them in too. So in the high yield market, we did raise our default forecast last week because we're a little bit concerned about this left tail of borrowers that haven't been contributing to the overall resilience in the credit markets. That coupled with higher related issuance in the high yield market, that market's not immune. Higher commodity costs, higher rates translating into a higher cost of capital leaves us on the margin somewhat concerned on the private credit point. I mean, in many ways we actually just treat this like broader credit. We have flagged recently that non accruals in credit and private credit have increased a little bit in the first quarter, but it's not outsized relative to the broader trend. The key point we are watching in private credit and the leveraged loan market is the 2028 maturity wall because there's a lot of software debt that needs to be refinanced. So so far that refinancing months out. Yeah. And we've already started your job for 18 months, but we've already started chipping away at that. It's been encouraging, but that's the key point we're watching.
- [02:04]
Edward Denny
All right. Tom and Amanda's latest report, Exhibit 5. We estimate nearly $200 billion of data center deal activity in the private market since the start of 2025. Man, I did not know that. Who's buying this stuff?
- [02:17]
Amanda Lyneham
It's happening under the surface, above and beyond the very meaningful supply that we've already had from the ecosystem. We estimate that's 5 trillion year to date. So just the numbers here are extraordinary. Private markets, there's four and a half trillion of dry powder in private markets across all categories right now. So that 200 billion sounds large. We think it's actually just the early stages. The good, I think the good thing about the private markets as it relates to this multi year issuance cycle is that we do expect the private markets will provide some certainty of financing in the later years. The simple point is that credit markets work best in funding releveraging when it's quantifiable and there's an end in sight. That's not really the case with this build out. So we do see a large role for private markets here.
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Edward Denny
Who are the borrowers when a data center gets announced and gets built? Is the borrower the construction company?
- [03:05]
Amanda Lyneham
So typically the borrower is an SPV that is separate from the hyperscaler. But I think what you are alluding to is something that we've noticed in our investor conversations is that a lot of investors are increasingly counting their data center exposure in their hyperscaler bucket.
- [03:20]
Edward Denny
Yes.
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Amanda Lyneham
And so I think it further increases our view, this is actually something we outlined in April, that issuer concentration and market saturation constraints will be binding.
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Tom Keene
Okay. To Paul's brilliant question and you're even better answer is this visible accounting is can fancy people like you or Frank Fabozzie actually go in and understand the balance sheets of this new debt?
- [03:47]
Amanda Lyneham
You can if you're willing to look at 10Ks and 10Qs, which we do. And actually just using the hyperscaler universe, there's about 1.2 trillion of lease commitments for data centers. Of that 700 billion is for data centers that haven't started yet, they haven't begun construction. So to your question Tom, that's not yet reflected in traditional leverage metrics that that commitment for a data center that hasn't begun isn't yet counted in the financials. Some rating agencies and many investors are adjusting that after the fact. But that it is possible to do it if you're willing to get into the financials.
- [04:22]
Edward Denny
So there are special borrowers here. But again is it if I'm going to my credit officer I'm getting approval for this loan. Can I tell them at the end of the day Microsoft is backstopping this
- [04:32]
Amanda Lyneham
thing and all of the deals are different and whether or not they're fully amortizing or how the guarantee works or for example if there is a construction delay, who's on the hook? I unfortunately can't paint it with a broad brush. But I think what is most critical from our perspective is that there's there's a lot of focus on the hyperscaler debt issuance but actually data centers like the ones you are referencing have represented more than 20% of AI related supply this year. So it's important to track the AI related issuance from the broader tech ecosystem, not just the hyperscalers and it further increases that competition for Edward Denny joined
- [05:06]
Tom Keene
us 12 noon on Friday and he said something profound. It went out of the zeitgeist nicely. He said these rates were at now are what were normal years ago. So that's, you know, to me that's a really profound idea. I looked at a yearly chart of a tenure going back to Eisenhower and the answer is after the great moderation I guess we're back to something new or to Dr. Yardeni's point, is it something that's normal?
- [05:36]
Amanda Lyneham
I listened to that interview. It was great. I did 42 the unique. I think while that's true Tom, the important consideration for credit investors though is that the credit markets have grown so much since that time and the shape of the credit market is very different. And so the last time when we were at these rate levels so kind of pre financial crisis, the credit markets were tiny. We didn't have as much refinancing that was happening. We didn't have this capital intensive build out where again I think it's hard to understate the, the importance of this being a multi year issuance cycle. And so that's really what we think is most critical.
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Edward Denny
So I see a lot of these companies not borrowing, not just in the U.S. but in Canada, in Europe. I think that's a good thing, isn't it? Show the breadth of this.
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Amanda Lyneham
Yes, borrowing and that's something we expect to continue. The thing that jumped out to us actually European AI related credit has been holding in a little bit better than the U.S. and so we dug under the surface as to why. It's exactly the point you raised. There's been a global amount of issuance but it hasn't been as heavy in Europe. So we do see scope for the issuance in Europe to increase in smaller regional markets like Canadian dollar, Swiss franc. Those markets are tiny so they're not going to be able to do the heavy lifting. That's where we think the private markets are will come in.
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Tom Keene
Amanda, thank you so much. Let us know, give us a front, you know, when Goldman Sachs is doing the next hyperscaler piece, you know, give us a ring, send a raven. It's like House of Dragons, Game of Thrones, Send a raven. So we know a man in the line in there with Goldman Sachs.
- [07:03]
Edward Denny
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