AI Debt Warning Signs Mount: Why Bond Markets Are Getting Nervous About AI Infrastructure Spending

The boom in artificial intelligence (AI) poses a small problem: someone has to pay for it. Despite the surge in sales, costs remain well above revenue, and more companies are turning to the debt market to make up the shortfall and continue AI development.

But as companies borrow more to build their data centers and fill them with advanced chips, investors are becoming nervous about when they will see a return – or if they will. This week, that fear has played out in the bond market where yields are soaring, and the cost of insuring debt against default has reached record levels for companies like CoreWeave And Oracle.

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CoreWeave Lenders Are Getting Nervous

The turbulence was violent enough to Nvidia CEO Jensen Huang will step in to try to reassure investors, telling them that “CoreWeave’s financial strength is improving every day.” Despite his insistence, the company’s bond prices fell; some were trading at around 80% of face value, firmly in “distressed” territory. Rates are also climbing, with the October 2031 bond yield reaching 16%.

Jensen Huang. Image source: Getty Images.

Perhaps the clearest sign of bond investors’ unease was the rise in the five-year credit default swap (CDS) spread – essentially the cost of insuring CoreWeave debt against default – which hit a record high of around 1,195 basis points. In simple terms, that means it would cost an investor $119,500 per year to insure $1 million of CoreWeave debt.

Oracle borrowings come under scrutiny

If CoreWeave paid the price, Oracle (NYSE:ORCL) was not spared either. On Thursday, its five-year CDS spread approached 300 basis points, a record for the company.

Oracle bonds due November 2032 yielded 7.24% on Wednesday. This follows a recent credit rating downgrade from S&P Global, which now rates Oracle just one notch above speculative or “junk” rating.

Unease extends to the entire AI business

Links related to The meta The Hyperion data center project has fallen, trading around 91 cents on the dollar and with yields as high as 7.55% in late September. CDS spreads have exceeded 100 basis points.

SoftBank, a major backer of OpenAI and other AI projects, saw its five-year CDS spread climb 24 basis points to 424 on Thursday. EspaceX also saw its debt insurance costs rise sharply during the week.

Higher rates make calculations more difficult

There are a few things going on here. First, it is increasingly difficult to ignore the macroeconomic situation. Oil prices continue to rise, reinforcing already significant inflationary fears. The most recent wholesale price data indicates things are moving in the wrong direction.

This has led to a rise in U.S. Treasury rates, and with the 10-year bond yielding around 5%, companies are forced to offer a significantly higher yield to convince investors to accept additional risk.

That’s the macroeconomic pressure, but the economics of AI itself are just as important. This is an incredibly capital-intensive business. Companies must spend enormous sums of money to build and equip data centers before these facilities generate revenue.

And ultimately, this revenue must cover operating costs, interest payments and the initial investment. It is still unclear whether all of these projects will generate enough revenue to justify their cost. The longer uncertainty persists, the more likely investors are to demand in return for lending money to these companies.

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AI Debt Warning Signs Mount: Why Bond Markets Are Getting Nervous About AI Infrastructure Spending was originally published by The Motley Fool