SpaceX (SPCX.US) faces pressure from a large new bond issuance, with spreads widening and book value losses exceeding $300 million.

SpaceX's record-breaking bond issuance is rapidly deteriorating in the secondary market, traders say, with almost no recent memory of such a sharp widening of spreads after listing. According to sources, large market makers are quoting SpaceX's 2056 bonds at a spread of about 28 basis points wider than the original "US Treasury yield + 175 basis points" level set at issuance (approximately 203 basis points currently). Since the bonds started trading, the unrealized losses from SpaceX's $25 billion issuance have continued to mount. As of Thursday's close, the widening spreads relative to US Treasuries have resulted in approximately $305 million in unrealized losses. Criticism towards the long-dated bonds (20-year and 30-year) has been greater than towards the medium-term bonds, as the spread that had narrowed by underwriters to near $90 billion at one point has now almost completely widened back. Traders point out that this price trend indicates that more fast money accounts have entered this round of subscriptions, rather than traditional buy and hold long-term investors. Of note, SpaceX's stock plummeted 16% the day before the bond pricing on Tuesday, but the stock price stabilized after the pricinghighlighting the pressure to sell off the bonds. Although there may be more technical factors behind the bond sell-offsuch as hedge funds covering short positions or hedging short positionsthe unprecedented widening of spreads still points to SpaceX's unique risk characteristics. Despite Moody's forecasting negative cash flow for the next few years and Elon Musk's personal dependence seen as a "key rating constraint," SpaceX still received an investment-grade rating. Tony Trzcinka, portfolio manager at Impax Asset Management, said, "We expected spreads to widen after SpaceX's bond listing, but not to this extent. This may be a perfect storm of multiple factorsover $600 billion in market value evaporation from its peak, technical pressure from the unexpectedly increased issuance size, and investors still figuring out how to price its unique risk characteristics." Compared to the recent performance of other large bond issuances in the secondary market, SpaceX's widening spreads are quite unusual. For example, NVIDIA Corporation issued $25 billion in high-grade bonds this month in seven parts. The 5.55% bond due in 2046 has widened by about 8 basis points since issuance, similar to the spread changes of the 5.625% bond due in 2056. In contrast, Alphabet Inc. Class C, parent company of Alphabet, issued long-term bonds in February that have even narrowed spreads. Widening spreads typically indicate increased uncertainty about a company's debt repayment ability. After this round of widening, SpaceX's credit curve now trades closer to Oracle Corporation, another company with the same rating, which also experienced spread widening after its long-term bonds were listed. Meanwhile, tech stocks dragged global indices lower on Friday, with the chip sector facing another sell-off. There are reports that OpenAI may delay its IPO plans, further dampening market sentiment. Two prominent hedge fund managers in China have also issued warnings, saying the global AI frenzy has turned into an unsustainable bubble. In terms of subscription structure, the strongest demand for SpaceX's bonds is in the five-year category, resulting in a larger reduction in financing costs for the company in that term. Demand for the 20-year and 30-year bonds is noticeably weaker, with the most significant decline in demand in this issuance. A SpaceX spokesperson did not immediately respond to a request for comment, and the investment banks that underwrote this bond issuance have not commented on SpaceX's bond trading levels. This year, as tech giants compete to raise billions of dollars to support AI projects, bond investors have been overwhelmed by massive issuances. As of Tuesday, US high-grade bond supply for June had reached $175 billion, setting a new monthly record, surpassing $169 billion for the same period in 2020. As reported on Thursday, credit default swaps (CDS) tied to SpaceX's bonds have started trading actively this week, providing investors with a tool to hedge potential losses or speculate on the company's credit condition. This will spur more two-way trading activity, meaning more ways to build risk exposure, potentially boosting liquidity in the bond's secondary market.