"Star Bond Fund" warns: Exercise caution in the bond market amid the AI craze

On Friday, DoubleLine Capital, which manages over $90 billion in assets, warned fixed-income investors to remain cautious when financing the AI boom. Robert Cohen, the firm's head of global developed market credit, pointed out that the profitability of large capital projects is uncertain, and the emergence of new financing structures such as off-balance-sheet financing may pose chain risks to companies in related industries like power and chemicals.

Tech companies are igniting a wave of AI investment lending, with Alphabet issuing $17.5 billion in bonds in the U.S. this week, following a €6.5 billion ($7.48 billion) bond issuance in Europe. Last week, Meta Platforms raised $30 billion, having previously secured $27 billion through private placements for its Louisiana-related projects. Oracle issued $18 billion in bonds in September.

Despite concerns, Cohen expects strong demand from fixed-income investors for tech industry debt due to an overall supply shortage in the credit market. Morgan Stanley predicts that large cloud computing companies will invest about $3 trillion in infrastructure projects such as data centers before 2028, with about half needing to be financed through debt.

However, Cohen is skeptical about private credit, believing it lacks liquidity and transparency, and does not provide sufficient additional returns for investors.

AI Financing Boom Raises Chain Risk Concerns

In the latest Bloomberg podcast, Cohen stated that investors need to be cautious not only about the tech industry but also about the related industries supporting these new projects. He warned, "If the music stops, who knows what kind of chain reaction will occur?"

He specifically pointed out the emergence of new financing structures such as off-balance-sheet financing, and that it remains unknown whether these large capital projects will be profitable. Cohen cautioned that overcapacity could lead to losses, putting related companies in industries like power and chemicals in jeopardy.

Cohen, who has worked at DoubleLine for 13 years, stated:

At some point, these projects must prove to be profitable. If we find that most projects are not profitable, the market will react severely.

Trillion-Dollar Financing Demand Remains in High Demand

Morgan Stanley predicts that tech giants known as hyperscale cloud computing companies will invest about $3 trillion in infrastructure projects such as data centers before 2028. The firm estimates that cash flow can support about half of the funding needs, but a significant amount of debt will still need to be raised.

Despite concerns, Cohen expects sufficient demand from fixed-income investors for all upcoming tech industry debt offerings. Although the total issuance of bonds and loans is at a high level, the net issuance remains low due to insufficient corporate merger and acquisition activity and a focus on refinancing.

Cohen stated that the overall supply in the credit market is insufficient, thus investors are eager to accept more bonds.

The Value of Private Credit is Questioned

The private market is also keen to fund the data center boom, but DoubleLine, which invests in both public and private debt, does not believe that the latter can provide investors with sufficient excess returns to compensate for its poorer liquidity and transparency.

Cohen stated:

I believe there are no excess returns in private credit, and our clients are actually raising questions with skepticism.

Cohen added that some of DoubleLine's clients who have invested heavily in private debt are disappointed with the returns and have not requested more such investments. Instead, they are interested in alternatives and wish to diversify their private credit exposure.

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