The cost of insuring against defaults by technology companies reached record highs on October 15 as investors grew concerned about debt financing the AI investment boom. Heavily indebted data center operators were hit hardest, as hotter-than-expected U.S. inflation and expectations of higher interest rates raised doubts about whether massive AI investments can generate enough returns to cover borrowing costs. Five-year CDS spreads for CoreWeave surged past 1,100 basis points, and its 2031 bond yield briefly hit 16 percent before easing to about 14 percent, while the loss-making company owes nearly US$50 billion. Oracle's CDS approached 300 basis points, while Amazon, Alphabet and Meta also hit record levels but rose more slowly. CoreWeave shares fell 15 percent on October 14 and another two percent on October 15, wiping out nearly a fifth of their value in two days, while Anthropic's reported third-quarter revenue of $16.8 billion, up 45 percent from the previous quarter, did little to ease concerns.
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- AI debt concerns drive default insurance costs to record highs
Insurance costs against defaults by technology companies reached record highs as investors grew concerned about debt financing the AI investment boom. Heavily indebted data center operators were hit hardest, as hotter-than-expected U.S. inflation raised expectations for higher interest rates. CoreWeave, a loss-making company owing nearly US$50 billion, saw its five-year CDS spreads surpass 1,100 basis points, implying a 64% default risk over five years versus about 30% a year earlier. Its shares lost nearly a fifth of their value in two days, while Anthropic's third-quarter revenue rose 45% from the previous quarter to $16.8 billion without easing concerns. Deutsche Bank's Jim Reid noted that capex is increasingly funded by debt rather than free cash flow, so credit price action deserves closer attention.
- AI debt concerns drive default insurance costs to record highs
Credit default swap costs for technology companies hit record highs on October 15 as investors grew uneasy about debt financing for AI investment, with heavily indebted data center operators hit hardest. CoreWeave's five-year CDS spread surged past 1,100 basis points, and a 1,000-basis-point spread implies a 64 percent default risk over five years, up from around 30 percent a year ago. Its 2031 bond yield touched 16 percent before easing to around 14 percent, and the company owes nearly US$50 billion. Oracle's CDS approached 300 basis points, while Nvidia, STMicroelectronics and SpaceX also rose sharply. Anthropic's third-quarter revenue rose 45 percent from the previous quarter to $16.8 billion, but this did little to ease concerns, and Deutsche Bank's Jim Reid said AI financing costs are not dramatic overall but show worrying signs at the edges.
- AI credit worries send default insurance costs to record highs
The cost of insuring against tech company defaults hit record highs on October 15 as investors grew worried about the debt financing the AI boom. Heavily indebted data center operators were hit hardest, as hotter-than-expected U.S. inflation and expected rate hikes raised doubts about whether AI investments can earn enough to service borrowing costs. CoreWeave, a loss-making company owing nearly US$50 billion, saw its five-year CDS spreads top 1,100 basis points and its 2031 bond yield reach 16 percent before easing to about 14 percent, while its shares lost nearly a fifth of their value in two days. Oracle's CDS approached 300 basis points, while Amazon, Alphabet and Meta hit record highs but rose more slowly. Anthropic's third-quarter revenue rose 45 percent to $16.8 billion, according to an investor, but did little to ease concerns.
- CoreWeave Is Projected to Have a 6.3x Gross Leverage Ratio by Year End. The Market Is Worried About the Neocloud's Balance Sheet.
CoreWeave's stock fell nearly 15.5% on Oct. 14 as investors worried about its debt-funded data center build-out, with higher bond yields raising borrowing costs. At the end of the second quarter, total debt was $27.6 billion against roughly $5 billion in shareholder equity. Analysts project debt rising to $47.6 billion and adjusted EBITDA reaching about $7.6 billion by year-end, a gross leverage ratio near 6.3x, and its 9.625% senior notes due 2032 fell below $80. The company reports a revenue backlog over $104 billion, but 65% of first-quarter revenue came from its top two customers, making it a riskier AI stock than hyperscalers like Microsoft.
- Why I am taking the other side of the trade that crushed the market Friday
The author argues that last week's sell-off, especially Friday's, does not mean the data center and AI 'super-cycle' is over. He suggests the selling may instead reflect unwinding positions and the collapse of a hedge fund that borrowed billions from a firm that has not yet disclosed its losses. He notes that semiconductors fell nine straight days and CoreWeave's corporate bond yields spiked, arguing the bond market is squeezing debt-funded buyers. He defends Nvidia and CEO Jensen Huang, saying Nvidia's funding of AI companies differs from the circa-2000 'vendor finance' that benefited vendors whose customers did not need their products. He believes AI demand is real, citing OpenAI, Anthropic and Google's Gemini, which have monetized AI at scale.
- Weak links start to show in AI borrowing
Trillions in borrowed money have fueled the AI boom, but investors are growing uneasy about whether more can be raised and repaid. CoreWeave, which has accrued $72 billion in liabilities to run 51 data centers, saw its bond prices crash, with investors pricing a more than 60% chance it would fail to meet its obligations. Oracle bonds also sold off, though less steeply, and the cost of insuring SoftBank's debt against default climbed. Barclays says the spread on risky AI debt rose more than 50% over six months. CoreWeave's model of leasing space for 15 years or more and subleasing it to shorter-term customers such as Meta, Microsoft and OpenAI has drawn WeWork comparisons, which the company disputes.
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