It’s the worst time in years to invest in AI credit markets

‘Almost no upside and plenty of downside’
Researchers at Andromeda are worried about the uncertain return on investment for investors who are financing the AI capex bonanza.
Researchers at Andromeda are worried about the uncertain return on investment for investors who are financing the AI capex bonanza.

The research team at Andromeda Capital Management isn’t holding back: Not only do they think credit markets for artificial-intelligence companies are complacent, but they also assess the current environment as the worst entry point into those markets in years, with historically tight spreads leaving “almost no upside and plenty of downside.”

Spending by hyperscalers is expected to run to $1.2 trillion in 2027, according to Bank of America analyst Vivek Arya, and that can no longer be funded out of free cash flow or equity. Most companies that aren’t public have to borrow money to expand, and that often means turning to the private-credit market.

In a research note published Tuesday titled “AI Credit: Heads I Win, Tails You Lose,” the global investment-management firm expressed its bearish views on this market, but the authors took pains to qualify that stance.

“We are not sceptical of AI as a technology — we are users ourselves,” wrote a team led by chief investment officer Alberto Gallo. “However, we are sceptical of the returns” for buyers of AI credit, which incorporates bonds, loans and other kinds of debt issued by companies in the AI sector. They cited the capped return on capital, the exposure to uncertain returns on invested capital and the lack of participation in the upside that’s available to equity investors.