S&P Takes on AI Debt Deals and Crypto Giants
More than a few years ago, I met with ratings agency analysts covering giant telecom equipment companies like Lucent Technologies. The telecom bust had already begun, but the analysts remained optimistic about the companies’ future. They were wildly wrong.
Roughly a decade later, the dominant ratings agencies, Moody’s and Standard & Poor’s, said that mortgage securities stuffed with risky loans were among the safest investments available. They were wrong again, and the global financial crisis ensued.
Now these same ratings agencies, and some newcomers, are tackling the twin booms in AI and crypto. So far, so good, but it’s early in the game.
Two recent actions by S&P make me optimistic that the ratings agency and its competitors could at least serve as reality checks for some of the euphoria. At best, they could prevent bubbles from growing to dangerous levels.
One was S&P’s detailed work on Meta Platforms’ $27 billion data center project in Louisiana. The other was its decision to downgrade tether, the world’s dominant crypto stablecoin, to its lowest possible ranking.
First a bit of context. Ratings agencies play an unusual role in financial markets. They are both participants and, because they have privileged access to company information, arbiters of riskiness for bonds and other securities.
They share this unusual role with accounting firms and stock exchanges. All three are supposed to bless the good companies—by giving them high ratings, signing off on their books or allowing them to list their stocks. They are also relied on to spot the bad ones. Most importantly, they should warn investors about companies that have too much debt, dodgy books, or governance and other problems that should keep them off stock exchanges.
In reality, all three are paid by the companies they are supposed to judge. That conflict of interest has made them ineffective when it matters most. It has shown up in the current era, most obviously in the exchanges’ willingness to list every crypto-stuffed stock, including one filled with dogecoin last week. In a similar vein, accountants recently blessed the books of bankrupt auto parts supplier First Brands Group, which now can’t account for $2 billion.
Rating agencies didn’t matter much to tech companies, until the AI boom. Software makers and the like didn’t issue much debt, and when they did, the ratings were embarrassingly good. Microsoft currently has a higher bond rating than the U.S. government. That doesn’t make much sense: While Microsoft certainly deserves a triple A rating, the federal government, for all of its dysfunction, still has the power to tax its people and print money to pay its bills. (The only other triple A–rated company is Johnson & Johnson.)
Meta’s Hyperion data center project in Louisiana was the first complicated data center deal to get a bond rating. It is also seen as a model for other cash-rich tech companies that want to spend big on AI but don’t want to dent their own credit ratings. To accomplish that, Meta created a special purpose vehicle that is 80% owned by investment firm Blue Owl. The SPV, not Meta, raised nearly $30 billion in debt and equity for the project.
S&P rated the deal A+, which is one notch below Meta’s own rating, meaning it’s riskier. The analysts said the deal itself was pretty risky, but Meta’s backing lowered that risk. Among the risk-reducing elements was a residual value guarantee that Meta would pay if it left the project before a certain date.
Even if the ratings agencies get it right, there are new hazards to watch out for. The biggest is private debt, a big AI funder that the ratings agencies don’t review. “We only get to see what comes to us; there are a lot of things that don’t come to us. Are those airtight like the others? We don’t know,” said David T. Tsui, an S&P managing director and technology sector lead.
He also points to AI startups with hundreds of billions in commitments dependent on cash flow that doesn’t exist right now. “If we’re going to pick out one company, OpenAI, we don’t see anything that goes on inside of them,” he said.
S&P’s other commendable effort involved tether, by far the world’s largest stablecoin. Last month, S&P lowered its assessment of tether to its lowest possible level, 5 on a scale of 1 to 5, essentially saying it lost confidence in the stablecoin’s ability to maintain its stability.
Stablecoins are pegged 1:1 against the dollar and hold safe assets like short-term Treasurys to maintain that peg. But a portion of Tether’s holdings are invested in riskier assets such as bitcoin, precious metals and loans. These assets rose from 17% of Tether’s holdings on Sept. 30, 2024, to 25% a year later, prompting S&P’s revision.
Tether has $181 billion in assets and is not shy about expressing its displeasure. Its CEO, Paolo Ardoino, criticized S&P’s track record from the financial crisis, calling the downgrade “a badge of honor.” Tether didn’t address S&P’s main reason for the downgrade.
The downgrade is unlikely to deter crypto fans, but it could push Tether to rein in its risk so it doesn’t scare some investors away. That’s exactly what a ratings agency is supposed to do.
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