About this episode
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.