Financing the AI boom: from cash flows to debt (www.bis.org)

A recent Bulletin from the Bank for International Settlements has highlighted a significant shift in the financing landscape for artificial intelligence (AI) developments as investments surge. Currently, AI investments represent a growing share of GDP, driving substantial economic growth. However, as the demands for funding increase, firms are transitioning from relying on operating cash flows to sourcing capital through debt, with private credit taking on a more prominent role in financing AI initiatives. This transition is noteworthy for the AI/ML community as it underscores a growing tension between equity valuations and debt market pricing. While the immediate risks to macroeconomic and financial stability are deemed moderate, the sustainability of the AI boom depends on firms' ability to meet and exceed high earnings expectations. This reliance on debt could magnify financial pressures if AI companies do not deliver, raising critical questions about the long-term viability of current investment strategies in the AI sector.