The giants running the AI boom's cloud infrastructure are showing signs of higher credit risk, according to a Wednesday note from Apollo Global Management. Torsten Slok, Apollo's chief economist, said the cost of credit default swaps on hyperscaler debt has climbed, and not because banks are simply ramping up hedges as new bonds hit the market.
"What the market is repricing is hyperscaler credit fundamentals, namely a debt-financed AI capex cycle with rising leverage, negative free cash flow and uncertain payback on depreciating assets," Slok wrote. He added that if dealer hedges on fresh issuance were the driver, a similar move would appear in bank CDS. That is not what the data show.
Slok's analysis shows the gap separating hyperscaler CDS from bank CDS has widened to about 60 basis points from roughly zero since October of 2025, indicating a hyperscaler specific rise in credit risk.
Apollo's note landed right after leaders behind frontier large language models said over the weekend they want to slow the pace of their product advances because of safety concerns. That could filter into the financial picture for the cloud platforms that run those models.
Plenty of market watchers think those companies are also pressing Washington for rules that insulate them from startup rivals and limit legal fallout from autonomous agents. "What I believe they're really shooting for is the Communications Act treatment that protected the social media guys," said Dan Alpert, founding managing partner at Westwood Capital. "They want some legislation that 'regulates' them, but what it really does is absolves them."
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According to the National Association of Attorneys General, the 1996 Communications Act's Section 230 means "internet platforms would not be treated as publishers of third-party content" and that "platforms would not be held liable for user-posted content."
"The banks have built up … fortress balance sheets … They have built up a significant equity buffer and they are now much more highly diversified in their exposure than they were during the mortgage crisis," Alpert said. "That is where the answer may lie in terms of the way the market is looking at the credit risk."
Tech investors counter that hyperscaler margins are improving, supporting the borrowing, and that it is early to draw hard conclusions from wider CDS levels. "[Hyperscalers] don't really add their capacity in a significant enough way into 2027 and 2028 to know how this is going to turn out," said Paul Meeks, who leads technology research at Freedom Capital Markets. "We're starting to see a turn to the positive in their margins, and if we continue to see [this], there will be less concerns."
FactSet shows Alphabet with a forward debt to equity ratio of 13 percent, with projected free cash flow at negative 25.7 billion dollars. Amazon has debt to equity of 23 percent and free cash flow of negative 30 billion dollars. Meta Platforms has debt to equity of 34 percent and free cash flow of negative 25.7 billion dollars. Microsoft has debt to equity of 7.34 percent and positive free cash flow of 33.4 billion dollars.
Economists are watching the same indicators after Apollo's CDS warning. "The issue here is that CDS investors, who are the most sophisticated investors anywhere (possibly wrong, but definitely in the weeds), are attaching far greater risk to the debt of the most profitable companies in the world," said Dean Baker, who founded the Center for Economic and Policy Research. "They obviously think there is a substantial risk that the AI companies cannot make good on their commitments."
If protection costs on hyperscaler debt have pulled about 60 basis points away from banks since October of 2025, and Apollo argues fundamentals are behind it, the takeaway is simple: the AI buildout leans on more borrowing while near term cash is tighter. The tension with improving margins is the plot to follow. Watch free cash flow and CDS spreads alongside any regulatory moves to see whether the massive AI spend starts paying back quickly enough for the firms footing the bill.
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