The Compute Must Flow: Project Finance 101 & Hyperscaler Ratings Refresh

Research evidence excerpt

The Compute Must Flow: Project Finance 101 & Hyperscaler Ratings Refresh

gether, we believe the fundamentals remain solid, but struggle to identify a catalyst that would

drive sustained outperformance until management can present a more convincing path to returns. Risks to our rating include

lowered capex guidance, or, alternatively, heavier near-term debt issuance than we presently expect.

We are downgrading Microsoft to Underweight.

Our downgrade is driven primarily by expected heavy supply. Microsoft is the only hyperscaler in our coverage that has yet to

access the bond market to fund its capital projects, and with ~$190bn of calendar 2026 capex, another step higher expected in

2027 and ~$9bn in FY27 refi needs, the eventual funding requirement is difficult to reconcile with current valuations. The 10yr

remains the tightest point in IG TMT and continues to trade through peers, leaving little compensation for the issuance we expect.

That richness is even more notable given the steepening in the curve as the ‘52s have moved wider, suggesting the market is just

beginning to price expected long-end supply. We expect repricing to broaden across the curve as issuance materializes, and

the technical backdrop is reinforced by a softer fundamental outlook. Microsoft’s AI growth has trailed peers, the path

forward appears less clear, and the evolving relationship with OpenAI adds further uncertainty. Taken together, we expect an

unusually large funding need, sector-leading valuations and a less defined growth outlook to leave spreads skewed wider from

current levels. Risks to our rating could materialize if Microsoft opts to fund a large share of its capital needs with equity

issuances or cash on hand.

We are also upgrading Oracle to Overweight