Allianz Trade: Tech Debt Risks Hidden Below Surface Despite Calm Markets
A new report from Allianz Trade reveals that hidden liabilities for major tech companies are significantly increasing, despite stable public figures. Current credit spreads may not adequately compensate for these growing risks.
Allianz Trade has published an analysis highlighting the growing debt and associated risks within the technology sector. The report, titled "The (A)Iceberg Beneath," indicates that while publicly disclosed debt for eight dominant U.S. tech companies has risen 86% in the past year, the true debt burden lies in off-balance-sheet commitments.
These off-balance-sheet liabilities increase the companies' total debt by an average of nearly 150%. The report suggests that current market credit spreads, which are below 1% for 5-year bonds and around 2% for 10-year bonds, may not be sufficient to cover the escalating risk should artificial intelligence (AI) investments fail to deliver expected returns.
The analysis, employing Merton, KMV-inspired, and CreditGrades models, finds that while market pricing and ratings for recognized debt are largely justified, off-balance-sheet obligations diminish the model-implied credit quality. This discrepancy can remain undetected by market pricing for an extended period, as companies' distance-to-default remains significant.
According to Allianz Trade, the technology sector's debt sensitivity has increased substantially. While the model-implied credit quality varies from the strongest to the weakest, the average sits near the median. This trend is driven not only by the growth in recognized debt but also by increasing off-balance-sheet obligations that are not directly reflected in traditional credit rating models.
The report warns that as the technology sector constitutes an ever-larger portion of corporate credit portfolios, investors must pay close attention to the true risk profile. Companies' ability to meet their obligations under stress scenarios, such as equity market downturns and increased volatility, is crucial. Allianz Trade emphasizes the need to monitor credit spreads relative to companies' actual quality and financial commitments.