News about default risk

Default-protection costs for technology companies hit record highs on October 15 as investors grew uneasy about the debt financing the AI investment boom, with heavily indebted data center operators hit hardest. Hotter-than-expected U.S. inflation and expectations of higher rates raised doubts about whether AI spending can generate enough returns to cover mounting borrowing costs. CoreWeave, a loss-making AI cloud company owing nearly US$50 billion, saw its five-year CDS spreads top 1,100 basis points, and its shares lost nearly a fifth of their value in two days. Oracle's CDS neared 300 basis points, while Amazon, Alphabet and Meta also hit record highs but rose more slowly. Anthropic's 45% quarterly revenue jump to $16.8 billion did little to ease fears, and Deutsche Bank's Jim Reid said AI financing costs are not dramatic overall but show worrying signs at the edges.

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.

Bears have sounded alarms on AI many times since ChatGPT, but this time the concern is whether trillions in AI spending will pay off, weighing on debt-laden CoreWeave, whose stock fell and credit default swaps surged. Solus strategist Dan Greenhaus says CoreWeave is not a canary signaling an imminent bust, though rising rates could expose the most speculative parts of the buildout. Gartner says AI data center owners need $8.5 trillion in cumulative revenue through 2030 to cover capex, financing and a 12% return, while AI revenue headed to data centers may total only $3.6 trillion at most. Bank of America says the boom follows a classic capital cycle that often ends in disappointment, as competition intensifies and business AI spending has started to dip.

Nonprofit credit counselor Money Management International (MMI) said it managed more than $1 billion in client debt through September, its highest level since 2013. September also saw more than 2,500 new debt-management plans, the most since March 2011, and over 60,000 active plans. The Federal Reserve's 2025 Survey of Consumer Finances found 19.6% of borrowing families fell behind on payments in the prior year, up from 12.2% in 2022. Clients referred by generative-AI search, mainly ChatGPT, rose 48.8% year over year, and 60% of them held at least one unsecured personal loan at initial counseling. The article warns that debt consolidation can backfire if borrowers rebuild credit-card balances before repaying the consolidation loan.