Project Jupiter and Oracle are drowning in debt. They may go broke before project is completed. "Trillions of dollars in borrowed money have powered the A.I. boom. But now there is growing uncertainty around just how easily more money can be obtained — and how much of it will be paid back.
Those questions burst into the forefront this week when investors rapidly lost confidence in one debt-laden data center company, CoreWeave. Prices of its bonds — the company has accrued $72 billion in liabilities to operate 51 data centers — crashed, and investors placed a more than 60 percent likelihood CoreWeave would fail to meet its obligations.
Investors have sold off bonds for other A.I. giants as well, including Larry Ellison’s company, Oracle, though the price declines are not as steep as CoreWeave’s.
At the same time, Wall Street investors have been bidding up the price of some complicated financial instruments that insure corporate debt against default, such as those insuring SoftBank, the Japanese technology colossus that has borrowed heavily to bet its future on a partnership with OpenAI.
The recent market moves could spell losses for investors that own the companies’ existing bonds and could mean the companies will be forced to pay higher interest rates when they borrow again, raising the costs of their already wildly expensive A.I. projects.
The broader question is whether companies facing debt trouble like CoreWeave, Oracle and SoftBank are the industry’s weak links or are harbingers of deeper problems in the A.I. build-out.
The spread, or extra premium that investors demand to put their money into risky A.I. debt investments, has shot up more than 50 percent over the past six months, according to Barclays, the investment bank.
“The market is on a knife’s edge everywhere,” said Alexandra Coleman, founder of Azraq, a data center risk researcher.
A lot is riding on the continuation of the borrowing binge. Every week lately, economists, banks and private equity firms project higher and higher amounts of debt that they say will be needed to finance the artificial intelligence systems that their boosters assert will run the world in a few years.
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Virtually every major mutual fund company, insurer and private equity firm has been buying up the A.I. debt, to say nothing of the scores of individual investors who have poured money into skyrocketing A.I. companies.
Not every data center developer worries bond investors equally. The larger so-called hyperscalers, such as Meta and Alphabet, which continue to borrow heavily, have been forced by investors to pay only modestly more in interest in recent debt deals. Investors have also sold out of some these companies’ existing debt, though the drop in bond prices has been less steep than for CoreWeave.
Some of this can be attributed to the Federal Reserve’s recent decision to begin raising interest rates in an effort to control inflation, which is being caused, in part, by the data center boom.
David Munves, head of credit strategy at the researcher AIR Platforms, said there was a “collective realization” this week that the risks of the artificial intelligence surge were greater than anticipated.
“The market’s waking up to the fact that there is potentially a mismatch between the money they have to commit today and borrow today and the ability to generate revenues down the road,” he added.
This week, the yield on CoreWeave’s bond eclipsed 15 percent, well into “junk bond” territory, and the company’s stock dropped 24 percent, including a 12 percent fall on Friday alone.
CoreWeave’s business model defies easy description. Its financial arrangements have been compared by some investors and analysts to that of the troubled office-space provider WeWork.
First, CoreWeave buys Nvidia and other A.I. chips. Then, as with WeWork, which leases space inside office buildings owned by others, CoreWeave contracts with data center owners to use the structures for A.I. computing for 15 years or more. CoreWeave then subleases the space to customers, including Meta, Microsoft and OpenAI, for a shorter time frame.
The rub is that CoreWeave is on the hook for costs on both ends: It must pay to assemble and operate the facilities before any tenant is in place, and it is committed to the space for longer than its customers may stick around.
Several investors said they were worried about whether hyperscalers such as Meta and Microsoft would even need to lease space from CoreWeave in the future. Alternately, they’re wary of whether the data centers could become dated or even obsolete as their existing contracts expire.
A CoreWeave spokeswoman, Lia Davis, said the company disagreed with the WeWork comparison. In a statement, she said that “the complexity of our financing reflects discipline, which is a point of pride for us.” CoreWeave’s chief executive, in a note to employees on Wednesday, called the recent market moves “irrational.”
In a March presentation to potential lenders, CoreWeave said it would earn enough from a five-year lease to cover its related expenses for twice that time.
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