Jonathan Raa | Nuphoto | Getty Images
Debt markets are sending a message to AI data center builders: We’re raising your credit card interest rate and could impose new limits on your credit limit.
This analogy comes courtesy of Christopher Wood, global head of equity strategy at Jefferies, who noted in a note Friday: “The most plausible way the AI investing arms race will end is the abolition of the credit card.” »
That hasn’t happened yet, but credit markets have been spooked by the new political landscape – seeing more barriers to data centers under Democratic governors in key states, as well as a Democratic-controlled Congress.
The typical example of debt stress is Neocloud Basic weave. The yield on its bond maturing in 2032 with a coupon of 9.625% climbs above 16%. Coreweave’s five-year credit default swaps climbed above 1,289 basis points on Thursday, widening above their October peak, according to Deutsche Bank. The CDS fell 8% on Friday to around 1,155.
“We’ve had a lot of warnings from the credit industry,” Jim Reid, global head of macro and thematic research at Deutsche Bank, said on Friday. Debt and stocks are now moving in more synchrony, he added, “so we’ll have to see if credit goes even further.”
Investors are demanding more compensation to insure against default, even among companies with the strongest balance sheets and credit ratings, including Nvidia, BroadcomAnd Amazon.com.
CDS on Nvidia debt rose 76% last month. Broadcom’s CDS is up 49%, while Amazon’s has gained 44%. Their CDS remain low in absolute value; Nvidia’s spread was around 139 basis points, compared to around 298 basis points for Oracle and around 1,100 for CoreWeave. A large increase from a low starting point does not imply the same credit risk.
Still, the rise in CDS is a sign that markets want more protection against default, even among the largest and healthiest debt issuers. And the rise in CDS implies higher financing costs in the long term.
The market is now grappling with the prospect that at least some data center spending will be delayed or abandoned under new Democratic governors in Ohio, Texas and Georgia, with all three states holding much of the planned capacity.
The moratoriums could impact 45% of planned capacity in the United States, much of it in Texas, according to Goldman Sachs. Texas Gov.-elect Gina Hinojosa said she is not opposed to data centers but wants a moratorium until the state Legislature passes protections for communities.
None of this means that AI debt financing is collapsing. Goldman counts five AI bond deals totaling $67 billion since Oct. 29, bringing total hyperscaler debt issuance this year to $296 billion. Goldman forecasts $440 billion in large-scale debt issuance next year, as well as an additional $300 billion in project-level issuance in the investment grade and high-yield categories.
Trump administration pledges support for data centers. National Economic Council Director Kevin Hassett told CNBC on Friday that he expects data center growth to continue as expected, despite Democrats’ big election victories.
What comes next
The big question now is how quickly AI spending will generate enough cash to allow hyperscalers to keep investors comfortable with future investment plans. For neoclouds, any signs of consolidation or reduction of investments could lead to fewer or fewer contracts for data center computing or delays in advance payments.
Goldman analysts said hyperscalers collectively reported negative free cash flow in the third quarter, with capital spending outpacing operating cash flow.
“Delayed monetization and growth in purchase commitments – which we view as additional and important uses of liquidity, separate from capital expenditures – are the main risks to increased debt issuance, subject to market conditions,” according to the bank.
Peak AI debt issuance may now be closer. Bank of America analysts estimate that AI-related credit issuance will increase 31% between 2026 and 2027, to $685 billion, including public and private debt. They then forecast a decline of 23% to $531 billion in 2028.
As for the risk? “There is a downside to these forecasts due to a potential slowdown in AI infrastructure projects following the blue wave, which would reduce investment needs and therefore debt market financing,” BofA said in a note.
-CNBC’s Nick Wells and Michael Bloom contributed reporting
Gn bussni
