- Equity captures the upside of the AI build-out, while credit absorbs the loss if it fails – yet creditors are compensated with under 1% p.a. on 5-year bonds and around 2% on 10-year. The asymmetry has grown as total long-term debt at the eight dominant US tech companies rose by 86% in the 12 months to mid-2026. If AI investment pays off, equity holders benefit; if it does not, the added debt, increasingly compounded by off-balance-sheet commitments, leaves creditors exposed to a skewed distribution of outcomes that current spread levels may not reflect. This paper tests whether spreads price that skewed risk using three structural credit models – Merton, and KMV-inspired, and CreditGrades – with financial-filing and equity data for eight mega-caps.
- On recognized debt, the market’s calm is justified but we see the first drifts. Our modelling agrees with market pricing and ratings on most names. As of mid-2026, recognized leverage across the panel is low, at 0.2% to 6.8%, implying credit risk broadly consistent with Aaa–A ratings. Three of the eight screen weaker than their formal rating due to high leverage (Meta) or equity volatility (Oracle, SpaceX).
- The real risk lurks below the waterline: off-balance-sheet debt lifts the debt burden by nearly 150% on average, and pulls the model-implied credit quality down 1-2 notches. The deterioration surfaces as quality migration before it surfaces in price, because distance-to-default is too far for spreads to react. The market has noted the direction, but not yet the size: CDS spreads more than doubled over the past year, while the average model-implied credit spread rose six-fold once off-balance-sheet debt is included. Off-balance-sheet debt keeps growing as new commitments are signed, and AI profit potential, even realized, offers little spread-tightening against it.
- Ranked against the broad corporate credit universe, the panel is bifurcated: model-implied credit quality spans from the 97th percentile (strongest) to the 2nd (weakest), with the average sitting near the 62nd — barely better than a median credit. In effect, the rank bought by rising market capitalizations and compressed volatility is being spent on debt growth, both recognized and hidden. The two legs are not symmetric – debt is contractual and accumulates on schedule, while equity relies on the future.
- A severe market repricing – equity down 10%, volatility up 10pp, debt up 50% – would cost the panel two standard deviations of distance-to-default, translating into ~ 20bps of model spread. Debt sensitivity is actually lower: recognizing leases – equivalent to 150% of debt – moves spreads by only ~10bps, with wide dispersion across names. Mid-2022 is the natural stress test: the same balance sheets, carrying far less debt, still showed vulnerability – volatility and time horizon matter more than rates or equity levels .
- As tech allocation in credit portfolios grows, spreads do not fully compensate for skewed risk. Default risk is still remote, but spread risk will increasingly surface. The liability leg is contractual and arrives on schedule, while the equity leg can reverse in a quarter. Tech’s curve steepness already prices the long horizon as the key risk, and that may extend to the front-end. Tech has avoided the iceberg so far, but the navigation is getting trickier, and the metric to watch is spread vs. quality ranking within the corporate market, including by financial commitments and equity volatility.
The (A)iceberg beneath tech debt: Recognized calm, rising spreads below the waterline
Summary
FAQs
Because most of it is not visible on the balance sheet. Beyond reported financial debt, the eight largest US tech companies (Microsoft, Apple, Alphabet, Amazon, Meta, Nvidia, Oracle, and SpaceX) have signed more than $1 trillion in off-balance-sheet commitments. Most of that is in data-center leases that have yet to be realized, and long-term AI compute or power agreements. All of these commitments behave like debt but aren't yet recognized as such.
No, not just now. Recognized, or on-balance-sheet, leverage across the panel is low, ranging from 0.2% to 6.8%. This is consistent with Aaa–A credit ratings for most of the tech companies. But credit quality drift and spread risk could eventually put the firms in jeopardy.
Only partially. Average CDS spreads for the panel more than doubled over the past year (~22bps to ~50bps), while model-implied spreads rose roughly six-fold, once off-balance-sheet debt is included. The market has recognized the direction of the risk but has not yet come to terms with the full size of it.
Three things they should keep an eye on are: debt migration, or leases convert from disclosed commitments to recognized debt on a fixed schedule through 2031; equity volatility, meaning a reversible market input that currently offsets rising debt; and how their credit quality ranks against the broader corporate credit market. Big tech’s current average ranking sits near the 62nd percentile within the US corporate universe, which is barely better than a median credit.