The “London Whale” killer is back! The AI bubble theory is raging. Rumor has it that Saba Fund sells CDS from giants such as Oracle and Microsoft

The Zhitong Finance App learned that people familiar with the matter said that Boaz Weinstein's Saba Capital Management Company has sold credit derivatives targeting large technology companies such as Oracle (ORCL.US) and Microsoft (MSFT.US) to banks in recent months, mainly due to concerns about the risks brought about by the AI investment boom in debt financing.

The source said the bank sought to avoid potential losses by purchasing credit default swaps (CDS) from the US hedge fund management company. The Saba Fund is famous for its successful bet against J.P. Morgan's trader known as the “London Whale.” The “London Whale” incident means that in 2012, a J.P. Morgan Chase trader made a bank loss of more than 6 billion US dollars due to the establishment of a huge position. Saba Fund (and its manager, Boaz Weinstein) played a counterpart in this, identifying the risks, betting and ultimately profiting from buying credit default swaps (CDS).

Although the value of credit insurance will increase as the market's expectations of the company's default risk rise, current prices suggest that these tech companies still have a lower risk of default compared to other industries.

The source with direct knowledge of the deal said Saba sold CDS targeting Oracle, Microsoft, Meta, Amazon, and Google's parent company Alphabet to the bank.

Some large asset managers, including a private credit fund, are also keen to buy the product, the source said.

Microsoft and Oracle declined to comment. Meta, Google, and Amazon did not immediately respond to requests for comment.

Tech companies' debt climbs, banks seek protection

This development highlights that the market is currently anxious to hedge against the risk of surging AI companies' valuations and growing debt burdens. It also points to a concern that if the current AI boom is proven to be a bubble, once it bursts, it will trigger a sharp correction in the stock market, which in turn will impact the economy.

The source said that this is the first time Saba has sold hedge protection for some of these companies, and it is also the first time that the bank has requested this type of transaction from the hedge fund.

The financial institutions are seeking protection against the company's accumulated debt on its balance sheet as they are borrowing heavily to fund their multi-billion dollar AI projects, sources said.

According to a customer report released by Goldman Sachs on Friday, there has also been an increase in customer demand for hedging protection in the industry in stock derivatives transactions.

Speaking about the technology-related CDS market on Monday, Deutsche Bank's Jim Reed commented: “Part of this is due to concerns about the supply of AI corporate bonds in the coming quarters, after an unexpected surge in recent weeks.” However, these CDS also appear to be used as general hedging tools for various AI long positions.”

There are concerns about a bubble, but the risk is still lower than other industries

Although the ultimate purpose of CDS is to provide compensation in the event of a company's bankruptcy, the value of these derivatives themselves will grow as the company's economic health deteriorates.

Oracle and Alphabet's CDS prices are at their highest level in two years, while S&P Global data shows that such contracts between Meta and Microsoft have risen sharply in recent weeks. According to S&P data, Meta's CDS data only began to be recorded in late October.

Although CDS contract prices for big tech companies have risen sharply, analysts note that current levels are still lower than some investment-grade companies in other industries.

According to S&P data, Oracle's five-year CDS spread reached more than 105 basis points last week, while Alphabet and Amazon's CDS spread traded around 38 basis points, and Microsoft traded around 34 basis points.

Borrowing from hyperscale companies (essentially large AI tech companies) has surged in recent weeks. Meta raised $30 billion in debt last month. Oracle raised $18 billion in September. Google's parent company Alphabet has also entered the market for financing.

Bank of America data shows that in fact, in September and October alone, the number of investment-grade bonds issued by the industry reached more than double its annual average.

However, Société Générale pointed out on Tuesday that interest spreads on these companies' bonds are still below the level of overall investment-grade credit, while other institutions such as Citibank emphasize healthy balance sheets for hyperscale companies.

Bank of America's chief investment strategist Michael Hartnett said in Friday's weekly “Money Flow” report: “The best short target is the corporate bonds of AI hyperscale companies.”