Credit derivatives on Meta start trading after big bond sales

[NEW YORK] Derivatives allowing investors to bet against Meta Platforms’ bonds began actively trading for the first time this week, as money managers and banks look to hedge their exposure to an industry that has been piling on debt to pay for artificial intelligence (AI) investments.  

Credit derivatives tied to Meta’s debt traded on Thursday (Oct 30), when the social media giant raised US$30 billion in the biggest US corporate investment-grade bonds offering of the year, according to people with knowledge of the transactions, who asked not to be identified as the details are private. That transaction comes after a US$27 billion private bond sale earlier this month to help fund a data centre in Louisiana that Meta will use and partly own. 

One list of prices from a dealer that Bloomberg reviewed had the cost of protecting Meta’s debt against default for five years at a mid-point of about 0.45 percentage point annually, or around US$45,000 a year for every US$10 million of principal protected. The swaps also traded early Friday, they said. At least US$20 million of protection was bought and sold over the past two days, based on DTCC data compiled by Bloomberg.

Credit derivatives allow a party to effectively buy insurance-like protection against a company defaulting on their debt. If a corporation doesn’t pay interest on its bonds, for example, the owner of credit derivatives can receive a payout. When a company’s credit becomes riskier, credit derivatives are often the first market to reflect investors’ jitters, because it’s often easier to buy and sell derivatives than to trade actual bonds.  

Investors and banks are looking for ways to cut their exposure to the technology industry as companies prepare for investments in AI that could run into the trillions of dollars, much of which will be funded by debt. In the US public bond markets alone, tech companies raised about US$157 billion this year through late September, up some 70 per cent from what they issued in the same period last year, according to data compiled by Bloomberg.

Traders have been buying more insurance against Oracle bond defaults after the company raised US$18 billion in the corporate-bond market last month. Morgan Stanley expects the trend to continue in the near term as the tech giant pours more money into AI investments. BLOOMBERG