What Do Credit Default Swaps in the Technology Sector Signal Ahead of Upcoming Earnings?

Executive Summary

• A credit default swap (CDS) in the Technology sector has become a barometer of market concerns about AI-driven capex, leverage, and refinancing risk based on Visible Alpha insights and S&P Global’s Document Intelligence tools.
• S&P Global Dow Jones Indices’ CDS data shows spreads in the 1-year, 5-year and sub-1-year tenors remain elevated for some names but may have peaked for others. Meanwhile, S&P Global Dow Jones Indices’ credit indices show that spreads currently sit near historically tight levels.
• Widening CDS spreads does not imply an imminent default; rather, they reflect investors’ demand for higher risk compensation and focus on earnings and fundamentals.
• In this blog, we examine the CDS data of a major AI cloud infrastructure partner, “Company A”, catalysts behind its widening spread, and peer group CDS trends.

Why a Specific CDS is a Thematic Indicator

Company A is a major AI cloud infrastructure participant, but credit markets have re-priced the risk, as the focus drifts away from revenue growth. Its CDS now serves as a convenient way to express a sector-wide view, not merely a view of its fundamentals. This is because the name sits at the intersection of key themes driving the widening-AI infrastructure capex, accelerated debt funding, and the AI disruption narrative.

Catalysts Behind the Spread Widening

• Drifting fundamentals. Company A’s recent quarterly earnings point to a quick expansion in total debt (including leases) compared to lower YoY levels, according to Visible Alpha. Large  not-yet-on-balance-sheet lease obligations—linked to data center and cloud capacity contracts—have up to two-decade terms. Its 2026 financing plan contemplates raising debt and equity to fund AI infrastructure to meet the contracted demand from its largest hyperscaler and semiconductor clients. Capital allocation includes dividend payouts and share repurchases as the Debt to EBITDA ratio tests four times, a leverage level more typical of weaker credit issuers.
• AI capacity build-out is in a capital-intensive phase. Visible Alpha data indicates that Company A’s capex has surged, outpacing debt growth and exceeding internal funding, leading to negative free cash flow. Liquidity includes cash, marketable securities, and unused funding facilities. Remaining Performance Obligations reportedly jumped about 8x YoY, driven by large contracts with key clients. This backlog is a contracted revenue stream to be recognized in future quarters as orders are fulfilled. Creative financing structures and equity raises are part of the hyperscalers’ playbook to fund robust global AI demand.

• Circular deals concerns. While the lesser levered cloud cohort in Technology has solid balance sheets, they are also commingled—often serving as one another’s investors and clients. This creates systemic exposure that the market wants to see clarified. S&P Capital IQ Pro’s Document Intelligence tool indicates that (re)financing costs for AI data center debt, overcapacity risk, and the timeline to profitability are recurring topics in AI/AI-adjacent firms’ earnings calls. These issues partly led to higher 1-year and 5-year CDS quotes for Company A and for other highly indebted peers.

CDS Dynamics

CDS technicals are also a driver of wider spreads. S&P Global Dow Jones Indices' historical CDS datasets for hyperscalers show relatively muted dispersion in recent years given AI optimism and low debt. Looking ahead, investors, insurance firms, treasury risk teams, and banks are increasingly interested in hedging rising hyperscalers’ debt. As of February 27, insuring $10M of Company’s A debt for five years costs roughly $164,000  a year. Company A’s 1-year CDS liquidity score is ranked as High. As noted below, the rising number of dealer quotes in the 5yr and 1yr tenors—together with S&P’s proprietary live CDS analytics—supports price discovery, liquidity, and execution quality.

Visible Alpha’s financial data points to Company A’s BBB-rated peers stronger credit profiles and lower leverage, resulting in a rangebound 5-year CDS 68bps average through mid-February.  Visible Alpha data offers granular business lines segmentation, including AI and cloud, enabling accurate peer-group comparisons.

At the sector index level, S&P 500 Information Technology 5-year CDS indices for BB and BBB issuers show spread differentials of about 25  bps (1-year) and 65  bps (5-year)—levels near the lower end of historical ranges since the COVID-19 pandemic, as noted below. 

S&P Global Dow Jones Indices’ BBB and BB Technology CDS indices sit near the tightest 5-year spreads of the past decade, despite record AI-related debt issuance. While the market has absorbed the supply, such tight spreads are vulnerable to earnings misses or weakening fundamentals.

Equity and Bond Market Reaction

Despite the recent drawdown, Company A’s stock has returned >100% gains over the past five years, outpacing the S&P 500’s close to 80% gain as of March 2. S&P Global bond analytics show Technology sector credit spreads near record tight, yet Company A’s 5-year bond spread widened compared to five months ago and to peers’ quotes. Demand for AI debt continues, partly mitigating refinancing risk for now, as evidenced by strong oversubscription multiples for recent debt issuance.

As AI jitters persist, an attentive view of credit risk, debt cost, and growth expectations is essential for risk-managed positioning. Markets are likely to examine upcoming quarterly earnings for deviations in AI spending outlook, demand, leverage/lease trend, and sector-wide CDS dispersion to gauge whether spreads remain justified.