Late last week, I wrote about the hullabaloo over Oracle’s credit default swaps.

The overarching message from that linked article was that what you’re seeing in wider hyper-scaler CDS isn’t really default “bets,” it’s hedging to account for growing exposure to these companies’ debt as they become larger borrowers. In other words: It’s a risk management exercise.

That’s obvious to most people, but probably not to everyone, and the distinction’s important: We’re talking about some of the best companies in the history of capitalism here, and as such, credit protection, when it traded at all, tended to be less expensive than insurance on the broader index of high-grade borrowers (i.e., these are blue-chips among blue-chips — the best of the best).

The average cost to hedge your exposure to these names through CDS is just now catching up to the cost of what I’ll call “generic” insurance on the most widely-cited benchmark for IG corporate credit risk: CDX.IG 5Y.

Mind the context: You always need it. The figure on the right, from SocGen, shows you the average cost of insurance for Alphabet, Amazon, Apple and Microsoft versus the benchmark mentioned above, as well as that average inclusive of Oracle.

Note that same-tenor insurance on Meta’s debt started trading for the first time last month following the company’s mega bond offering at a mid-point of ~45bps, comparable to the “Big Tech + Oracle” average shown on the right, above, in red.

“Big Tech CDS has surged this year [but] current levels are still lower than IG CDS, which is near cycle-lows,” SocGen remarked.

None of that’s to suggest that borrowing (collectively) hundreds of billions of dollars to fund infrastructure (or access to infrastructure) for a largely unproven technology isn’t a risky endeavor, it’s just to say that,

1. The incremental risk is, for now, being priced as though it merely makes these companies as “risky” as the broader basket of 125 North American IG credits, which is to say not very risky, and
2. The higher cost of insurance reflects the necessity of hedging a structural shift in the blue-chip corporate bond market (i.e., a lot more big deals from big-tech), not enormous demand for naked lottery tickets on the collapse of history’s most valuable companies

As Bloomberg noted, a majority of demand for the single-name swaps emanates from banks, and there’s likely some stock hedging going on too given that sophisticated investors may be able to protect large positions more cheaply with CDS than equity options.

Obviously, this narrative changes the further down the rating spectrum you go. For example, CoreWeave’s CDS going from ~350bps in September to ~600bps in November is saying something meaningful about default probabilities. Amazon’s CDS going from ~25bps to ~40bps over the same period isn’t. Oracle’s somewhere in between.