The AI build-out needs enormous amounts of borrowed money. Bond investors are getting more nervous about who will pay it back.
The AI build-out needs enormous amounts of borrowed money.
Bond investors are getting more nervous about who will pay it back.
The artificial intelligence (AI) boom has a bit of a problem: someone has to pay for it. Despite soaring sales, the costs are still far ahead of the revenues, and more and more companies are turning to the debt market to fund the gap and continue the AI build-out.
But as companies borrow more to build their data centers and fill them with advanced chips, investors are getting nervous about when they'll see a return -- or if they will. This week, that fear has shown up in the bond market where yields are spiking, and the cost to insure the debt against default has reached record levels for companies like CoreWeave and Oracle.
CoreWeave's lenders are getting nervous
The turbulence was rough enough for Nvidia CEO Jensen Huang to step in to try to reassure investors, telling investors that CoreWeave's "financial strength is improving every day." Despite his insistence, the company's bond prices have plummeted; some were trading around 80% of face value, firmly in "distressed" territory. Rates are spiking too, with its October 2031 bond yield reaching 16%.
Perhaps the clearest sign of bond investor unease was the jump in the five- year credit default swaps (CDS) spread -- basically the cost to insure CoreWeave debt against default -- which reached a record high of about 1,195 basis points. In simple terms, that means it would cost an investor $119,500 a year to insure $1 million in CoreWeave debt.
Oracle's borrowing comes under scrutiny
While CoreWeave took the brunt of it, Oracle (ORCL -4.64%) was not spared either. On Thursday, its five-year CDS spread was nearing 300 basis points, a record for the company.
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Averytin News Financial update.