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Moody's AI Debt Warning Could Trigger an AI Crash

While the rating agencies often give empty warnings that result in no rating action, this one feels different. The Moody’s AI debt warning article published last week has a degree of specificity and alarm that makes me wonder if there will soon be a day of reckoning.

While the Moody’s article stopped short of explicit rating action, it does feel like a precursor to more aggressive rating action. In my view, this article was meant as a warning shot.

Below is the key takeaway:

“Heavy capital spending relative to revenue will lead to declining, and in some cases negative, free cash flow and will hurt leverage ratios, to the extent these expenditures are debt financed.”

Will Moody’s effectively shut off or curtail new AI debt issuance via issuing a private or public ratings warning that massive new debt issuance will have ratings consequences (as it should)?

Limiting the ability or raising the cost to issue debt will heavily impact the CapEx spend which is the entire foundation of the AI exuberance. There isn’t remotely enough cash or equity issuance capacity to fund the AI buildout. Debt is critical. And therefore bond investors and rating agencies get a vote.

And as I discuss in my post, revenue visibility, if it ever emerges, feels light years away when compared to the quantum of CapEx spend.

In this article I also discuss Meta’s $500B off-balance sheet exposure as well as S&P’s latest downgrade of Oracle’s debt.