This week Google owner Alphabet raised £1bn in a highly unusual century bond, in a sign of the extreme lengths tech firms are willing to go to to meet the ballooning capital costs of investment in AI.
The 100 year sterling note formed part of a $32bn debt raise for Alphabet, following similar moves from Meta and Oracle. All of it will likely go into AI – with Alphabet warning its capital expenditure is set to hit $185bn this year, more than double what it spent last year.
Century bonds are a rare beast, with Alphabet joining the ranks of only a few dozen firms who have ever attempted this form of financing.
According to S&P data, only around 360 bonds with a maturity of 100 years or longer have been raised over the past 40 years – an average of 9 per year.
The last big century bond frenzy took place in the mid 1990s, with 1997 being the record year with some 40 bonds raised.
During that time a lot of big US firms got in on the act – from major carmakers like Ford and Chrysler, to pharma giant Bristol Myers-Squibb, to telco Bellsouth and food processor Archer Daniels Midland.
Tech firms also jumped on the bandwagon, with IBM completing a $500m raise in 1996 and Motorola raising $300m in 1997.
According to Bloomberg, the 1997 Motorola deal is the last such century bond issue by a tech firm until Alphabet arrived on the scene this week – though arguably, that crown should go to Rockwell Automation, a Wisconsin-based software and digital transformation business which raised a $200m 2098 bond a year later.
Universities revive the century bond market
More recently, infrastructure firms and universities have revived the century bond market. The Canadian Pacific Railway Company issued a $900m bond in 2015, while Georgia based railfreight business Norfolk Southern raised $600m in 2021. MIT raised $500m in 2014, while Oxford raised £750m in 2017.
Why sterling? Analysts say there is plenty of appetite for long-dated debt such as this from UK pension funds – while the pound’s current strength could bring down Alphabet’s borrowing costs in the years ahead.
The tech giant has also pledged to invest £5bn in the UK, and those pounds have to come from somewhere. As I reported in December, the firm recently ploughed another £775m into its UK data centre subsidiary, and there will likely be more where that came from.
How well will the bond perform? Century bond issuance has typically followed a period of tumbling interest rates, making longer-dated debt more attractive for investors. The arrival of these bonds have a habit of signalling the top of a market, some say. Oxford University’s century bond is now trading at less than a third of what it was five years ago.
But Alphabet’s £1bn bond was heavily oversubscribed – more so than the shorter-term sterling tranches it sought to raise at the same time – with nearly £10bn in bids.
If that is anything to go by, and given AI’s unquenchable thirst for cash, this unusual Big Tech century bond is unlikely to be the last.
