CONTRIBUTORS
Mike Borowske
Head of Global Credit Research
Peter Chodas
Research Analyst
Chris Lum
Research Analyst
AI infrastructure is quickly becoming a defining investment theme across global credit markets. The scale and duration of the buildout will require substantial financing from both public and private markets, spanning a broad range of issuers and introducing novel deal structures and new sources of risk. The fundamental backdrop remains supported by growing demand for AI compute and persistent physical supply constraints, but AI infrastructure is not a homogeneous asset class. Credit risk varies across issuers, assets, counterparties, and structures, making disciplined underwriting and a cross-asset perspective essential to identifying attractive risk-adjusted opportunities. Western Asset’s AI Cross-Sector Working Group combines expertise across industries and asset classes to enhance due diligence, compare financing structures, monitor risks, and generate actionable investment ideas.
Key Takeaways
- AI infrastructure is emerging as one of the largest investment cycles in modern history, with public and private credit markets playing a central financing role through corporate and asset-backed issuance.
- The physical infrastructure required to support accelerating AI demand faces numerous supply constraints, contributing to the ongoing compute-constrained environment and rising hyperscaler capital expenditures.
- AI-related issuance is expanding rapidly as hyperscalers raise debt to fund higher spending while lease commitments, guarantees and financial backstops, and compute contracts support increased project-finance and secured issuance.
- Underwriting project-finance and asset-backed financings varies by project and asset, but generally focuses on counterparty quality, contractual terms, construction execution, refinancing risk, collateral value, and long-term asset competitiveness.
- Western Asset remains constructive on AI infrastructure while recognizing that sentiment-driven volatility, structural vulnerabilities, and execution risks heighten the importance of disciplined security selection and deal-specific underwriting.
- Western Asset conducts bottom-up issuer analysis to classify AI exposure across portfolios, helping portfolio managers manage thematic concentration and enabling risk teams to assess second-order effects and conduct robust adverse-scenario analysis.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal. Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
Privately held companies present certain challenges and involve incremental risks as opposed to investments in public companies, such as dealing with the lack of available information about these companies as well as their general lack of liquidity. An investment in private market investments is suitable only for investors who can bear the risks associated with them (such as private credit and private equity) with potential limited liquidity. Shares will not be listed on a public exchange, and no secondary market is expected to develop.
Investment strategies which incorporate the identification of thematic investment opportunities, and their performance, may be negatively impacted if the investment manager does not correctly identify such opportunities or if the theme develops in an unexpected manner. Focusing investments in the health care, information technology (IT) and/or technology-related industries carries much greater risks of adverse developments and price movements in such industries than a strategy that invests in a wider variety of industries.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.
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