PROVIDENCE, Rhode Island/NEW YORK, Oct 16 : A sharp decline in CoreWeave's bonds this week is emerging as a test of investors' willingness to keep financing the massive buildout of AI infrastructure, as rising borrowing costs and scrutiny of debt-funded expansion hit the sector.
Analysts and portfolio managers said the selloff in the data center operator's debt carries more significance than a concurrent rout in its shares because it may signal a broader reassessment of the risks tied to financing AI projects that may take years to generate revenue.
CoreWeave bonds issued in June at a yield of 9.675 per cent have plunged in value, sending their yield to 15 per cent this week.
"CoreWeave is absolutely the canary in the coal mine" for a market segment that is coming under more stress, said Max Frumes, global head of distressed and leveraged finance at 9fin, a fintech corporate credit data and analytics company.
"This is going to be a turning point in the pricing and availability and structure of credit that's supporting the AI boom," said Frumes, who believes that other AI-linked debt will follow CoreWeave into distressed territory. "It's going to get more expensive. There will be a lot more scrutiny and probably some pushback from investors."
CoreWeave shares fell 15.1 per cent from Monday's open through Thursday's close, despite a 6 per cent gain on Thursday after a vote of confidence from partner Nvidia. The decline was broadly in line with weakness in other so-called neocloud companies such as Nebius and Iren.
Credit investors said they already are becoming more selective.
"We're definitely taking another look at our exposures across the AI infrastructure space, particularly where the risks are concentrated and whether we're being adequately compensated for taking them," said John Han, a portfolio manager at fixed-income asset management firm F/m Investments.
F/m's portfolio contains unsecured CoreWeave bonds in one of its exchange-traded funds, but only because they make up part of the index tracked by the ETF. At their current yields those bonds "certainly deserve another look," Han said. He generally prefers to invest in high-yield securities via special purpose vehicles that may offer lower yields but also more collateral and less risk.
"The market is being very selective and really singling out anything that has more leverage, and (that may be) in a bit more challenging operating environment," said Larry Holzenthaler, senior portfolio manager of fixed income at Catalyst funds.
To Holzenthaler and other investors, what the markets are witnessing now is an overreaction as sentiment shifts from being overly upbeat to downright bearish.
In June, the risks driving the selloff - the sheer size of the funding needs, the leverage, the reliance on outside financing, the risk that the GPUs (graphics processing units) being purchased for data centers would be obsolete before the new facilities could open - were merely overlooked or downplayed.
"A few months ago, I would have said people were just too optimistic around AI," Holzenthaler said.
Deutsche Bank global head of macro and thematic research Jim Reid sees the market entering a new phase in which debt financing is becoming increasingly important.
"As we move to a capex cycle funded out of debt rather than simply free cash flow, we have to increasingly respect the credit price action," Reid wrote in a recent report. "AI financing costs aren't dramatic overall, but there are worrying themes at the edges."
Vanguard bond portfolio manager Brad Collins said assessing AI-related debt has become more challenging as issuers bring increasingly large and varied offerings to market, often forcing investors to make decisions in days or even hours.
Rising inflation has pushed financing costs higher overall and fueled concern about what lies ahead for mammoth AI capital spending plans. Then there is the growing political controversy surrounding the construction of data centers.
Even one of the tech sector's stalwarts allows that the road ahead may be bumpy at times. Dan Ives, partner and technology analyst at Yorkville Ives, an investment firm, estimates that 5 per cent to 10 per cent of planned projects ultimately will not be built.
"The growing noise around data center permitting and midterm rhetoric on power prices has given investors another reason to step back," Ives said.