Man Group flags AI credit bubble as debt soars

Man Group issued a note warning that debt tied to artificial-intelligence infrastructure is expanding rapidly and could create a credit bubble.

The firm cited estimates from Morgan Stanley that financing linked to AI and hyperscale data-centre development could reach about $400 billion in investment-grade bonds and $65 billion in high-yield debt. If realised, Man Group said, those figures would approach one-fifth of total bond market supply.

The firm highlighted strong issuance in high-yield bond and leveraged loan markets. Many issuers in those segments still generate negative free cash flow, increasing their need for external financing.

Man Group compared the potential scale of AI-related issuance with the dot-com era. Debt issuance by internet and technology companies peaked at roughly $85 billion in 2001, which equated to an average 14.5% share of total bond issuance across 2000 and 2001.

The note highlighted uncertainty over future returns on AI infrastructure investments. Man Group pointed to questions about the long-term profitability of newer cloud providers and smaller data-centre operators, especially those lower in the credit spectrum. The firm noted that rising leverage and larger capital requirements for data-centre builders and cloud operators could increase pressure on borrowers if revenue growth or margins fall short of expectations.

Sriram Reddy, head of client portfolio management at Man Group, wrote in the note that “the enthusiasm for the sector has encouraged significant overreach.” The firm advised investors to be cautious about the pace of expansion and the potential for higher defaults or downgrades if expected returns do not materialise.

Man Group identified planned investment in hyperscale facilities-large data centres that support cloud computing and AI workloads-as a major driver of the projected issuance. The note framed the surge in AI-linked debt as a funding cycle that could test credit markets if economic conditions or technology economics change.