Apollo flags hyperscaler debt risk

Private equity firm Apollo Global Management warned that credit default swaps for hyperscaler bonds are getting pricier, signaling rising credit risk in the companies powering the AI boom.

The real problem: fundamentals, not hedging

Apollo chief economist Torsten Slok found that widening CDS spreads reflect deteriorating hyperscaler fundamentals, not increased bank hedging. The issue is debt-financed AI spending with negative free cash flow and uncertain returns.

“What the market is repricing is hyperscaler credit fundamentals, namely a debt-financed AI capex cycle with rising leverage, negative free cash flow and uncertain payback on depreciating assets.”

CDS gap widens dramatically

The spread between hyperscaler and bank credit default swaps has widened to around 60 basis points from roughly zero since October 2025, showing that hyperscaler credit risk is increasing independently.

AI safety calls add financial pressure

Frontier AI model companies recently called for slowing technical advancements due to safety concerns. Some analysts believe they're seeking regulation similar to Section 230 of the Communications Act to shield themselves from competition and liability.

Hyperscalers show negative cash flow

Alphabet has negative forward free cash flow of 25.7 billion dollars, Amazon negative 30 billion, and Meta negative 25.7 billion. Only Microsoft shows positive free cash flow at 33.4 billion dollars.

Tech investors say margins will improve

Technology investors argue that hyperscaler margins are increasing and will justify the debt issuance. They say it's too early to worry about CDS spreads since capacity additions won't significantly impact results until 2027 and 2028.

“[Hyperscalers] don't really add their capacity in a significant enough way into 2027 and 2028 to know how this is going to turn out.”

Sophisticated investors see real risk

Credit default swap investors, among the most sophisticated in the market, are pricing in substantial risk that AI companies cannot meet their debt commitments despite being the world's most profitable firms.

“CDS investors, who are the most sophisticated investors anywhere, are attaching far greater risk to the debt of the most profitable companies in the world.”