Morgan Stanley warns: AI leveraged financing expected to remain sluggish, bar for new deals rises

Morgan Stanley said that with borrowing costs rising and potential construction delays weighing on market activity, AI-related leveraged debt issuance is expected to "remain subdued, with a higher bar for new deals." According to the bank's latest report, AI-related leveraged finance issuance totaled only $5 billion in October. That all came from a single borrower, Volta Infrastructure Holdings Ltd., which raised the funds through a term loan priced at a yield of more than 11%. Morgan Stanley expects issuance activity in this market to remain limited through year-end. After the U.S. midterm elections, companies relying on high-yield bonds and leveraged loans to finance new projects may face more obstacles in securing power supply and related approvals for new construction, the bank's strategists wrote. This could alter these companies' investment timelines and scale. Morgan Stanley said that to get deals done, developers may have to pay higher financing costs to compensate lenders for bearing construction risk; or repay more principal before refinancing; or first find tenants with better credit profiles. As investors scrutinize new projects more closely, financing for projects backed by lower-rated tenants could be especially difficult.