Alphabet Issues Rare Century Bond to Fund AI Expansion

Alphabet sold a rare 100-year bond as part of a USD 31.51 billion global bond raise. The financing will support artificial intelligence-driven spending, which has spurred significant borrowing among U.S. technology companies.

This issuance marks the technology industry's first century bond since Motorola's offering in 1997, according to LSEG data. Jason Granet, chief investment officer at BNY, described the period as "an extraordinary time period that we are living through now with the change in technology."

Granet stated, "Today it comes with a 100-year debt issuance out of Google... That is representative and indicative of a lot of the capital spending, a lot of the investment that is going through in markets and technology." The company also raised USD 20 billion in a seven-part offering on Monday, with maturities spanning from 2029 up to 2066.

Alphabet sold sterling bonds totalling USD 7.53 billion in a five-part deal. This included a 100-year tranche that raised 1 billion pounds, offering a 6.125% interest rate.

Demand for Google's century bond was nearly ten times the 1 billion pounds sought, according to IFR data, and it comes with a 6.05% yield. The Google parent also secured 3.055 billion Swiss francs (USD 3.98 billion) through a five-part bond sale.

These Swiss franc bonds have maturities ranging from three to 25 years. Bookrunners for the deal declined to be named.

Ultra-long-term bonds are seeing solid demand, particularly from life insurers, pension funds, and endowments with extensive obligations. Nicholas Elfner, co-head of research at Breckinridge Capital Advisors, noted a relative scarcity of long-end corporate bond issuance.

Alphabet's new bonds are distinct among recent technology deals due to a lack of covenants protecting investors, according to analysts at Covenant Review. Technology bonds typically feature covenants, such as an interest coverage ratio, ensuring a company can service its debt through operating income.

"The Alphabet bonds have no meaningful restrictive covenants," analysts wrote in a Monday note. They expressed concern this sets a "bad market precedent since other 'tech giants' do have covenants."

Analysts also highlighted that the bonds are not guaranteed by subsidiaries and lack protection against future subordination to other Alphabet debt.

The sale of a century bond is rare, with such issuances growing after the 2008 global financial crisis during periods of ultra-low interest rates. However, their frequency decreased after 2022 as central banks sharply raised interest rates following the COVID-19 pandemic.

Alphabet shares were down 1.78% at the close on Tuesday. Big Technology's shift to the bond market has concerned investors because payoffs have not kept pace with the substantial AI spending from U.S. technology giants.

Businesses adopting AI have seen limited productivity gains so far. Capital expenditure from Alphabet, Microsoft, Amazon.com, and Meta Platforms is expected to reach at least USD 630 billion this year, with most spending directed towards data centres and AI chips, according to Reuters calculations.

Some analysts believe Big Technology's increased use of debt indicates a transition from asset-light models to long-term infrastructure. Lale Akoner, global market analyst at eToro, explained that century bonds are usually "the preserve of governments or regulated utilities with very predictable cash flows."

Akoner noted this deal indicates investors are willing to undertake very long-dated risk tied to AI investment, at least for now. Piers Ronan, head of debt capital markets at Truist Securities, stated the century bond's inexpensive nature makes it an ideal option from an issuer's perspective.

From an investor's perspective, Ronan added, buying it is "a great idea because its duration risk is not much higher than the 30-year." He mentioned that only a few companies have issued century bonds in the dollar market since the global financial crisis.

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• Alphabet sold a rare 100-year bond as part of a USD 31.51 billion global bond raise.

• The financing aims to fund the company's expanding artificial intelligence initiatives.

• The century bond is the technology industry's first since 1997, with strong investor demand.

Source: REUTERS