Growing anxiety over financial sustainability of AI boom is sending shockwaves through credit markets, with the cost of protecting against potential debt defaults by major US technology companies surging and investors increasingly questioning whether the sector’s multibillion-dollar infrastructure investments will deliver the promised returns.
Credit Default Swap (CDS) costs climbed sharply for several tech companies, showing mounting concerns about debt exposure, borrowing costs and the profitability of the enormous investments being poured into AI infrastructure.
The warning signs are emerging despite AI-related stocks having recorded substantial gains in global markets this year. Over recent weeks, however, several companies have suffered notable share-price declines as investors reassess valuations amid inflationary pressures and rising interest rates.
CoreWeave raised alarm as CDS protection costs surged beyond 1,000 basis points, according to S&P Global Market Intelligence data cited in the report. The level is being interpreted as implying an approximately 63% probability of default over five years, compared with around 30% a year earlier.
The dramatic increase shows credit-market concerns surrounding highly leveraged businesses at the heart of the AI infrastructure boom. However, the implied probability is a market-based estimate, not a confirmed forecast that CoreWeave will default. CoreWeave is not the only company attracting greater scrutiny from credit-market investors.
iPhone 18 to carry ‘Higher Price Tag’ as Apple’s Costs jump amid AI Boom
CDS protection costs for Oracle have climbed to approximately 300 basis points, while Nvidia’s have risen to around 90 basis points in recent weeks. Meta’s CDS costs have reached approximately 104 basis points. By comparison, CDS index tracking investment-grade debt stands at around 60 basis points.
The gap shows how credit investors are assigning different levels of risk to individual companies compared with the broader investment-grade market. The trend also extends to major technology names, including Apple, Amazon and Microsoft, as demand for protection against potential debt defaults has increased across the sector. The report indicates that the pressure has been even more pronounced among certain heavily indebted competitors, suppliers and customers.
Rising CDS costs do not mean that these companies are on the verge of bankruptcy. They indicate that investors are demanding more money to insure against potential credit losses. The developments are unfolding against the backdrop of a vast global credit market.
International Swaps and Derivatives Association (ISDA) puts the market for CDS contracts linked to individual companies and debt issuers at approximately $9 trillion. Meanwhile, figures from the Bank for International Settlements indicate that the global bond market contains more than $150 trillion in debt securities.
Data from Depository Trust & Clearing Corporation show that average daily trading volume in the CDS market reached $16 billion in the second quarter, up from $13 billion a year earlier.
A credit default swap is a financial contract that provides protection against specified credit events, such as a borrower failing to meet its debt obligations. Investors use CDS contracts to hedge potential losses on bonds or to take positions based on their assessment of credit risk. The contracts are priced in basis points. At a CDS rate of 100 basis points, protection on $100 of debt costs approximately $1 annually.
As perceived default risk rises, investors typically demand higher premiums for providing protection, pushing CDS costs upward. Higher protection costs can also signal broader market concerns. Investors may sell the underlying bonds, potentially driving up borrowing costs for the companies involved and placing further pressure on their finances.
However, payouts depend on the terms of the contracts and whether a qualifying credit event occurs.
The post Tech Giants face AI Reality Check as Borrowing Costs, Credit Risks spike appeared first on Daily Pakistan English News.