Investors advised to diversify credit portfolios as AI-related debt risks loom

Matt Tickle, chief investment officer at Barnett Waddingham, says AI businesses globally have also begun issuing "meaningful amounts of debt and investment-grade credit", which could begin to crowd out the amount of capital available to other types of investors (Reuters/Dado Ruvic)

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Several large institutional investors have upped their allocations to private credit in recent months, even amid ongoing market uncertainty and credit fund withdrawals. However, heavy debt issuance by AI companies could push credit spreads wider, highlighting the need for investors to diversify.

Matt Tickle, chief investment officer at Barnett Waddingham, says AI businesses globally have also begun issuing "meaningful amounts of debt and investment-grade credit", which could begin to crowd out the amount of capital available to other types of investors.

It could also potentially create a spread event if AI debt provides a better rate of interest than other sectors.

Debt to finance the AI boom surged in 2025, with BNY Mellon finding that more than $120bn was issued to fund data centre projects and cloud computing by "hyperscaler" companies such as Amazon, Oracle, Meta and Microsoft.

The bank says investors were increasingly using credit default swaps to tamp down the downside risks when providing finance for AI. Between now and 2030, Morgan Stanley has predicted that AI capital expenditure could exceed $4tn.

Tickle says he is "not overly concerned" with default risks given the "reasonably okay" global economic outlook going into 2026.

The ICE BofA US Corporate Index Option-Adjusted Spread sat at 0.90 on March 20, drifting modestly from the levels of 0.75 seen in mid-January. But these still remain historically tight, leaving some investors wary of a potential spread shock.

Tickle says the consultancy is "a bit more worried by a spread event happening", even if "material default [risks]" continue to remain low.

Investors stay positive on credit in spite of mixed outlook

Spreads have remained tight as demand for credit continues to be strong among investors. Yet widening spreads could be indicative of market fears of uncertainty, an increased perceived risk of defaults and a wider market slowdown.

While a level of credit risk lingers, with some investors recently withdrawing from large private credit funds according to the FT, investors tracked by AOX sister publication MandateWire in recent months have appeared positive on different types of credit.

In March, the $66bn PMT and $67bn Pensioenfonds van de Metalektro had together selected Robeco Asset Management for a $1.32bn private debt mandate, focused on mid and large-cap European and Dutch companies.

The pension funds had previously appointed MetLife Investment Management to manage private debt, and now have a total of $2.6bn invested in the asset class.

Also this month the circa £1.3bn London Borough of Havering Pension Fund had agreed to increase its strategic allocation to private credit to 10 per cent, up from 7.5 per cent. But it agreed to reduce its holdings of other types of credit by 2.5 percentage points, along with reducing allocations to UK government bonds by 2.5 per cent.

In January, Ladi Runsewe, chief executive of the UK-based multi-family office UR, said private credit remained "central" to its clients' strategy, but added that his client base was "far more selective around governance, alignment and liquidity terms than they were even 12 months ago".

However, the large-scale financing of new AI innovation by the US's largest technology companies has created fresh uncertainty for investors.

In October last year, the Bank of England wrote that as the "projected scale of debt-financed AI and associated energy infrastructure investment materialises over this decade, financial stability risks are likely to grow".

Citing Meta's $30bn issuance of new investment-grade corporate debt in November, which made up almost 25 per cent of new US debt issuance that month, JP Morgan wrote towards the end of last year that high concentrations of debt supply to one sector "can pressure spreads wider as markets digest the new paper, particularly at longer maturities".

Asset owners should be “looking very carefully at why you're holding credit and how long you're planning to hold it for”.

Building robust credit portfolios in an era of AI

Tickle says asset owners should be "looking very carefully at why you're holding credit and how long you're planning to hold it for".

Investors with short-dated credit portfolios who are "comfortable with" credit risks may be less fazed by widening spread risks "if [they've] got [their] assets and liabilities aligned".

Investment-grade credit investments are still generating reasonably healthy returns, with MSCI's USD-denominated investment-grade Core Corporate Bond Index returning 7.67 per cent last year.

Tickle does not see a "systemic risk" arising in private credit, even as the Bank of England launched a new study into potential systemic risks arising from high use of private credit strategies in the UK.

But he caveats that private credit does not allow investors to fully diversify from risk in public credit markets. Rather, investors can achieve diversification through a wider exposure to different economic sectors, including utilities, healthcare and IT, he adds.

Corporate credit exposure can also be balanced with greater exposure to consumer credit, as well as a mixture of fixed and floating-rate credit products.

With UK investment-grade corporate debt "very concentrated" across several sectors, "even just going global gives you a bit of diversification benefit", Tickle says.