5 Nov 2026TRANSCRIPT
A Credit Perspective on the AI Buildout
The AI investment boom is reshaping capital markets, creating opportunities and raising questions about leverage and risk. Vishy Tirupattur and Dan Toscano discuss what this means for the credit cycle and the broader financial system.Read more insights from Morgan Stanley.----- Transcript ----- Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist.Today, a special conversation with one of the most seasoned professionals in credit at Morgan Stanley, Dan Toscano, on AI, credit, and the interplay between them. It's Thursday, November 5th at 11am in New York. Dan, last time we chatted here, you were very constructive on the potential for AI to be transformative in the economy and markets, and even more constructive on the role that credit markets will play in enabling that transformation.So, any way we cut it, we are talking about trillions of dollars of CapEx involved in the context of AI buildout. How are you thinking about the AI thesis, AI CapEx thesis and the role that the credit markets are playing?Dan Toscano: And every time I talk to you, the numbers go up. These numbers continue to expand. The opportunity set continues to expand for our clients. And I would say that nothing surprised me of what we've seen over the course of 2026.This is not simple, and this is not easy. And there are, as our CEO likes to say, known unknowns. And they factor heavily in the sentiment of investors. And when you're deploying trillions of dollars of capital in a way that has never been deployed in our lifetimes, there are bound to be air pockets.And so yeah, it's gone as I thought it might. And it just keeps getting bigger and bigger. And it's interesting to me that a lot of the discussion out in the marketplace these days has moved a little bit away from ‘what is this and how does it work’ to ‘what's the value proposition?’ And I think ultimately, that's the biggest question.And credit investors are asking that question in the form of trying to understand what can go wrong. It's the essence of a credit investor. And equity investors, although that's not my area of expertise, are asking, "What's the upside? And how should I value it today when a lot of these companies are going public for the first time?"Vishy Tirupattur: The markets are really questioning the return on the invested capital. How soon the returns will get realized? And monetization is the key word here. But at the back of this, we see that the level of rates have increased pretty meaningfully. Spreads have widened. So, overall borrowing costs for issuers here are clearly higher. So, on the back of this, do you see this as really a structural supply concern? The markets having to absorb a lot of supply. Or do you see this as being something larger than that? Is it a sign of a larger challenge within the credit markets?Dan Toscano: Yeah. I mean, there's a lot to unpack there. But look, I would say this. On the topic of, you know, what is the return? What is the value proposition? I've heard, really, two schools of thought from the marketplace. One is we think the return value proposition is high. And you've done some work on the early stages of this to value it.So, I hear people saying there's almost unlimited upside here, and I hear people saying, "I don't know what the value proposition quite is." I haven't really heard anyone say I think this is a stinker. And I think that's, you know, somewhat emblematic of the world we live in.But in terms of the cost of capital, I don't think we're seeing any of that in… Obviously underlying rates behave independently, and they're a function of a lot of factors, many of which are positive. And I keep reminding people that the backdrop that we conveniently pass by when we talk about this is an economy that is strong. Issuer earnings have been into the double digits quarter after quarter.And that's not something I would take for granted. And that can change. And it's done that despite energy instability, all the other things that are impacting the consumer. And yet, you know, we're producing earnings growth and cash flow that are significant. But back to your question about spreads, in particular. I mean, look at where spreads are today. They are, in my opinion, tight. I think we were at the all-time tights over the course of this year. And so, it's hard for me to sit here and say all this AI-related financing is driving up the cost of capital. We don't see it in spreads. And, you know, I think the debate around the impact of the trillions of dollars that need to be raised in all markets has yet to play out in the marketplace. People are talking about it, right? It's understanding that volume is coming in scale really hasn't happened, when you think about it. But the market I spend the most time in, non-investment grade credit markets, it's been quiet now for months.Vishy Tirupattur: In all my years of talking to you and learning from you, the one thing that's always stood out for me is: details matter. And especially when we talk about leveraged credit. So, in the context of AI financing in the leveraged credit market or the broader credit market, what type of details matter?Dan Toscano: Look, I think that it's evolving. We've talked, I think the last time we were here, we talked about the documents. You know, the documents matter. Investors are always complaining that the terms are too loose. But in the case of what is essentially project finance, I would say details matter in all caps. And put as many exclamation points after that as Elaine Benes would allow, if you remember the Seinfeld reference.Vishy Tirupattur: Indeed, I do. Dan Toscano: And so, you know, understanding the details of the lease. And to me, the fundamental question that underpins details matter is: what can go wrong? And if something goes wrong, what happens? And who's taking what risk? And you'll find that in the documents if you read them closely – in project financing – toll roads and power plants going back decades.You know, project finance and structured credit is not a new phenomenon. How and when does cash get disbursed? And who controls those decisions? So, you can protect yourself [so] that if something's going wrong, you don't have cash hemorrhaging out of the system uncontrollably. Things like that, they really matter.Vishy Tirupattur: You know, one other thing that I keep thinking about is whether the constraint is people or power availability, cost of capital or, you know, potential policy constraints. You know, some sort of a slowdown in AI CapEx is viewed rather cautiously by the equity markets.How do you think credit markets will handle, you know, a slowdown for any number of reasons in the pace of CapEx spend?Dan Toscano: Yeah. Well, I mean, I think the pace of CapEx spend gets measured against [a] company's ambitions. Not anything else. It's – We see an opportunity, we would like to take advantage of that opportunity. And in order to do so, we need to build capacity, right?So, what happens? Client says, "I want this thing built yesterday, not in a week." Okay. So, if it slows down relative to someone's ambitions, it doesn't really create a problem in my mind. All it means is gratification delayed.So, I think this can speed up, I think it can slow down, as fast as people are comfortable. And when I say people, I mean investors putting capital behind management teams. But I also think management teams feeling comfortable that they can control what they're doing and when they're building capacity… If they're buying chips or selling chips or trafficking in compute, they can speed up or slow down based on the environment around them without consequence.I think people get worried. And here's one element of timing that does matter, is, you know, once you put a shovel in the ground. And by shovel, I mean dollars, right? Time is money. And there's a lot of work being done around managing the cash flows, leading up to the construction of a data center, throughout the construction itself, which can take 12 to 24 months. And that assumes an environment that is friendly and conducive toward building data centers.And that's where it really matters.Vishy Tirupattur: So last question for you, Dan. I know you're a big UConn basketball fan. Other than the UConn basketball team prospects, what keeps you up at night in the context of AI financing?Dan Toscano: Yeah. Look, I mean, AI keeps a lot of people up at night. It doesn't keep me up at night. What keeps me up at night is UI.Vishy Tirupattur: U of I, University of Illinois, Fighting Illini, ranked number three ahead of UConn, may I remind you. Dan Toscano: December 4th, United Center, Chicago, Illinois, I will see you there.Vishy Tirupattur: I'll see you in Chicago, Dan. Thanks for taking the time to talk to us.Dan Toscano: My pleasure, Vish. Great to see you.Vishy Tirupattur: And thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.Dan Toscano is a member of Morgan Stanley’s Investment Banking Division and is not a member of Morgan Stanley’s Research Department. Unless otherwise indicated, his views are his own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.
