Meta's AI debt binge triggers credit downgrade warning, bond spreads surge

Meta, which has been pouring astronomical sums into artificial intelligence (AI) infrastructure, has received a bill for surging funding costs. Its core business cash generation has failed to keep pace with capital spending, pushing free cash flow into negative territory for the first time ever. Global credit rating agencies have warned of a downgrade, and the spread on its long-term bond issuance has spiked in just six months.

According to the bond market on Nov. 8, among the dollar-denominated bonds Meta recently issued across five maturities, the longest-dated 2056 bond was priced at a spread of 2.2 percentage points over U.S. Treasuries. That is about 0.9 percentage point higher than the spread on a similar-maturity bond Meta issued just six months earlier in April. The market demanded a massive additional premium for Meta's credit risk. Meta CFO Susan Li held a large-scale conference call to persuade investors for this bond sale, but could not avoid the higher interest costs.

The root cause of the rising funding costs is the deterioration in free cash flow. Meta raised its full-year capital expenditure (CAPEX) guidance to $135 billion–$145 billion from the previous $130 billion–$145 billion. Its investment plan, which stood at $115 billion–$135 billion at the start of the year, has been raised three times. As a result, even as its core digital advertising business continued double-digit growth, third-quarter free cash flow swung to a deficit of $2.12 billion. Meta is tapping external sources to fill the shortfall. Following the sale of $25 billion in common stock and issuance of $12.5 billion in convertible preferred shares, it raised 9 billion euros in its first-ever euro-denominated corporate bonds in the European market, engaging in all-out borrowing. It also plans to secure up to $60 billion more through an at-the-market stock sale program.

As financial burdens mounted, S&P Global Ratings on Oct. 30 kept Meta's corporate credit rating at 'AA-' but slashed its rating outlook to 'negative' from 'stable'. A negative outlook is a warning that an actual downgrade could follow within one to two years. S&P projected Meta's free cash flow deficit would widen to $71 billion by 2027 and that cash outflows could continue beyond 2028. If net debt surges to cover the shortfall, Meta's adjusted leverage ratio is expected to exceed the 1.0x threshold for maintaining its rating and climb to around 1.3x by 2028.

The difference in monetization structure versus rival big tech firms is also cited as a weakness. S&P noted that unlike Microsoft or Google, which have their own cloud revenue models, Meta has limited ability to convert AI investment into revenue in the short term. Unlike competitors that sell cloud infrastructure itself to recover costs, Meta must rely on raising ad prices within its own services or increasing user engagement time. In fact, Meta had to pay a higher interest premium on its bonds than Alphabet, a competitor that directly monetizes cloud infrastructure.

Meta management sought to calm concerns during the conference call, saying it would refrain from additional unsecured corporate bond issuance at least through the second quarter of next year. The market is watching whether Meta can prove clear numbers on AI monetization amid its massive borrowing. Another variable is that regulatory scrutiny of data center power grids and infrastructure construction in the United States is expected to become stricter after the election. If Meta cannot accelerate the recovery of its AI infrastructure investment costs, its funding safety net itself could face a structural crisis.

※ This article is an AI translation of the Korean original published by Korea Credit News; it was checked by automated quality guards and published by the English edition desk.