The cost of insuring against tech defaults struck record highs on Thursday, as investors rushed to hedge against the risk of credit stress building in the AI trade, with heavily indebted data centre operators like CoreWeave hit hardest.
Hotter-than-expected US inflation data, together with mounting expectations for higher interest rates, are adding to concerns about how quickly massive investment in artificial intelligence will translate into profits, as well as whether heavily indebted companies can generate returns fast enough to service mounting interest costs.
Credit default swaps (CDS) are sending a warning signal to markets.
The standouts were five-year CDS spreads for CoreWeave, which blew past 1,100 bps, according to S&P Global Market Intelligence data , while the yield on the company’s 2031 bond rose to as much as 16% before retreating to around 14%.
Cloud computing giant Oracle, which has also stirred up investor angst because of its vast borrowing, saw its CDS near 300 bps, bringing the rise this week to around 31 bps. CDS for Nvidia, Franco-Italian chipmaker STMicroelectronics and SpaceX, which offers some AI services, rose sharply.
CoreWeave, a loss-making “neocloud” company that owes nearly $50 billion, according to LSEG data, is in the eye of the storm.
“CoreWeave is quickly becoming the AI trade’s canary in the coal mine,” said Kathleen Brooks, research director at XTB.
“Its bonds have sold off sharply … this is a sign that investors might be going off the AI investment narrative, which has included massive debt issuance to fund AI ambitions.”
A surge in quarterly revenue from AI developer Anthropic did little to calm the market’s nerves.
According to an investor who attended a pre-IPO meeting with the company’s leadership in San Francisco on Wednesday, third-quarter revenue rose 45% to $16.8 billion from the previous quarter. Anthropic is targeting a valuation of $2 trillion.
DEBT MARKET JITTERS
CDS spreads show the number of basis points charged for default protection. The greater the perceived risk of a credit event, the wider the spread, meaning the 1,000 bps for CoreWeave CDS implies a risk of default in the coming five years of 64%, up from around 30% a year ago.
Earlier this week, Broadcom Chief Executive Hock Tan compared the investor rush for anything AI-related to “casino gambling.”
CoreWeave stock was down another 2% on Thursday, following a 15% slide on Wednesday, meaning nearly a fifth of the company’s value has burned up in two days.
CoreWeave shares have now fallen 10% since the start of this year, while those of rival Nebius, for which there are no publicly tradable CDS, are up about 114%.
Credit default swap spreads for Amazon, Alphabet and Meta also traded at record highs, data from LSEG and S&P Global Market Intelligence showed, though they have risen far more slowly than Oracle, or CoreWeave.
“This is not the first time we’ve had a sizeable market wobble on the back of AI fears, but 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. AI financing costs aren’t dramatic overall, but there are worrying themes at the edges,” Deutsche Bank strategist Jim Reid said.