Recorded at our 2025 Technology, Media and Telecom (TMT)
Conference, TMT Credit Research Analyst Lindsay Tyler
joins Head of Investment Grade Debt Coverage Michelle
Wang to discuss the how the industry is strategically raising
capital to fund growth.
----- Transcript -----
Lindsay Tyler: Welcome to Thoughts on the
Market. I'm Lindsay Tyler, Morgan Stanley's Lead Investment Grade
TMT Credit Research Analyst, and I'm here with Michelle Wang,
Head of Investment Grade Debt Coverage in Global Capital Markets.
On this special episode, we're recording at the Morgan Stanley
Technology, Media, and Telecom (TMT) Conference, and we will
discuss the latest on the technology space from the fixed income
perspective.
It's Thursday, March 6th at 12 pm in San Francisco.
What a week it's been. Last I heard, we had over 350 companies
here in attendance.
To set the stage for our discussion, technology has grown from
about 2 percent of the broader investment grade
market – about two decades ago – to almost 10 percent
now; though that is still relatively a small percentage,
relative to the weightings in the equity market.
So, can you address two questions? First, why was tech
historically such a small part of investment grade? And then
second, what has driven the growth sense?
Michelle Wang: Technology is still a
relatively young industry, right? I'm in my 40s and well over 90
percent of the companies that I cover were founded well within my
lifetime. And if you add to that the fact that investment grade
debt is, by definition, a later stage capital raising tool. When
the business of these companies reaches sufficient scale and cash
generation to be rated investment grade by the rating agencies,
you wind up with just a small subset of the overall investment
grade universe.
The second question on what has been driving the growth? Twofold.
Number one the organic maturation of the tech industry results in
an increasing number of scaled investment grade companies. And
then secondly, the increasing use of debt as a cheap source of
capital to fund their growth. This could be to fund R&D or
CapEx or, in some cases, M&A.
Lindsay Tyler: Right, and I would just add
in this context that my view for this year on technology credit
is a more neutral one, and that's against a backdrop of being
more cautious on the communications and media space.
And part of that is just driven by the spread compression and the
lack of dispersion that we see in the market. And you mentioned
M&A and capital allocation; I do think that financial policy
and changes there, whether it's investment, M&A, shareholder
returns – that will be the main driver of credit spreads.
But let's turn back to the conference and on the – you know,
I mentioned investment. Let's talk about investment.
AI has dominated the conversation here at the conference the past
two years, and this year is no different. Morgan Stanley's
research department has four key investment themes. One of those
is AI and tech diffusion.
But from the fixed income angle, there is that focus on ongoing
and upcoming hyperscaler AI CapEx needs.
Michelle Wang: Yep.
Lindsay Tyler: There are significant cash
flows generated by many of these companies, but we just discussed
that the investment grade tech space has grown relative to the
index in recent history.
Can you discuss the scale of the technology CapEx that we're
talking about and the related implications from your perspective?
Michelle Wang: Let's actually get into some
of the numbers. So in the past three years, total hyperscaler
CapEx has increased from [$]125 billion three years ago to [$]220
billion today; and is expected to exceed [$]300 billion in 2027.
The hyperscalers have all publicly stated that generative AI is
key to their future growth aspirations. So, why are they spending
all this money? They're investing heavily in the digital
infrastructure to propel this growth. These companies, however,
as you've pointed out, are some of the most scaled, best
capitalized companies in the entire world. They have a combined
market cap of [$]9 trillion. Among them, their balance sheet cash
ranges from [$]70 to [$]100 billion per company. And their annual
free cash flow, so the money that they generate organically,
ranges from [$]30 to [$]75 billion.
So they can certainly fund some of this CapEx organically.
However, the unprecedented amount of spend for GenAI raises the
probability that these hyperscalers could choose to raise capital
externally.
Lindsay Tyler: Got it.
Michelle Wang: Now, how this capital is
raised is where it gets really interesting. The most
straightforward way to raise capital for a lot of these companies
is just to do an investment grade bond deal.
Lindsay Tyler: Yep.
Michelle Wang: However, there are other more
customized funding solutions available for them to achieve
objectives like more favorable accounting or rating agency
treatment, ways for them to offload some of their CapEx to a
private credit firm. Even if that means that these occur at a
higher cost of capital.
Lindsay Tyler: You touched on private credit.
I'd love to dig in there. These bespoke capital solutions.
Michelle Wang: Right.
Lindsay Tyler: I have seen it in the
semiconductor space and telecom infrastructure, but can you
please just shed some more light, right? How has this trend come
to fruition? How are companies assessing the opportunity? And
what are other key implications that you would flag?
Michelle Wang: Yeah, for the benefit of the
audience, Lindsay, I think just to touch a little bit…
Lindsay Tyler: Some definitions,
Michelle Wang: Yes, some definitions
around ...
Lindsay Tyler: Get some context.
Michelle Wang: What we’re talking about.
Lindsay Tyler: Yes.
So the – I think what you're referring to is investment
grade companies doing asset level financing. Usually in
conjunction with a private credit firm, and like all financing
trends that came before it, all good financing trends, this one
also resulted from the serendipitous intersection of supply and
demand of capital.
On the supply of capital, the private credit pocket of capital
driven by large pockets of insurance capital is now north of $2
trillion and it has increased 10x in scale in the past decade.
So, the need to deploy these funds is driving these private
credit firms to seek out ways to invest in
investment grade companies in a yield enhanced manner.
Lindsay Tyler: Right. And typically, we're
saying 150 to 200 basis points greater than what maybe an IG bond
would yield.
Michelle Wang: That's exactly right. That's
when it starts to get interesting for them, right? And then the
demand of capital, the demand for this type of capital, that's
always existed in other industries that are more asset-heavy like
telcos.
However, the new development of late is the demand for capital
from tech due to two megatrends that we're seeing in tech. The
first is semiconductors. Building these chip factories is an
extremely capital-intensive exercise, so creates a demand for
capital. And then the second megatrend is what we've seen with
the hyperscalers and GenerativeAI needs. Building data centers
and digital infrastructure for GenerativeAI is also extremely
expensive, and that creates another pocket of demand for capital
that private credit conveniently kinda serves a role in.
Lindsay Tyler: Right.
Michelle Wang: So look, think we've talked
about the ways that companies are using these tools. I'm
interested to get your view, Lindsay, on the investor
perspective.
Lindsay Tyler: Sure.
Michelle Wang: How do investors think about
some of these more bespoke solutions?
Lindsay Tyler: I would say that with deals
that have this touch of extra complexity, it does feel that
investor communication and understanding is all important. And I
have found that, some of these points that you're raising –
whether it's the spread pickup and the insurance capital at the
asset managers and also layering in ratings implications and the
deal terms. I think all of that is important for investors to get
more comfortable and have a better understanding of these types
of deals.
The last topic I do want us to address is the macro
environment. This has been another key theme with the conference
and with this recent earnings season, so whether it's rate moves
this year, the talk of M& A, tariffs – what's your sense on
how companies are viewing and assessing macro in their decision
making?
Michelle Wang: There are three components
to how they're thinking about it.
The first is the rate move. So, the fact that we're 50 to 60
basis points lower in Treasury yields in the past month, that's
welcome news for any company looking to issue debt. The second
thing I'll say here is about credit spreads. They remain
extremely tight. Speaking to the incredible kind of resilience of
the investment grade investor base. The last thing I'll talk
about is, I think, the uncertainty. [Because] that's what we're
hearing a ton about in all the conversations that we've had with
companies that have presented here today at the conference.
Lindsay Tyler: Yeah. For my perspective,
also the regulatory environment around that M&A, whether or
not companies will make the move to maybe be more acquisitive
with the current new administration.
Michelle Wang: Right, so until the dust
settles on some of these issues, it's really difficult as a
corporate decision maker to do things like big transformative
M&A, to make a company public when you don't know what could
happen both from a the market environment and, as you point out,
regulatory standpoint.
The thing that's interesting is that raising debt capital as an
investment grade company has some counter cyclical dynamics to
it. Because risk-off sentiment usually translates into lower
treasury yields and more favorable cost of debt.
And then the second point is when companies are risk averse it
drives sometimes cash hoarding behavior, right? So, companies
will raise what they call, you know, rainy day liquidity and park
it on balance sheet – just to feel a little bit better about
where their balance sheets are. To make sure they're in good
shape…
Lindsay Tyler: Yeah, deal with the
maturities that they have right here in the near term.
Michelle Wang: That's exactly right. So, I
think as a consequence of that, you know, we do see some
tailwinds for debt issuance volumes in an uncertain environment.
Lindsay Tyler: Got it. Well, appreciate all
your insights. This has been great. Thank you for taking the
time, Michelle, to talk during such a busy week.
Michelle Wang: It's great speaking with
you, Lindsay.
Lindsay Tyler: And thanks to everyone
listening in to this special episode recorded at the Morgan
Stanley TMT Conference in San Francisco. If you enjoy Thoughts on
the Market, please leave us a review wherever you listen and
share the podcast with a friend or colleague today.
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