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What do you do when your financial capacity to help your customers buy your products becomes stretched? You turn to Wall Street, of course.<\/p>\n
That\u2019s what Nvidia has done, enlisting some of the biggest names in private capital<\/a> \u2013 Goldman Sachs, Apollo Global, KKR, Brookfield and Black Rock \u2013 to arrange a pool of $US500 billion ($708 billion) or more of capital to help fund purchases of Nvidia chips.<\/p>\n The firms haven\u2019t actually committed that much capital \u2013 they\u2019ve signed memorandums of understanding, not lines of credit \u2013 and every project brought before them will be individually evaluated.<\/p>\n Nevertheless, Wall Street has provided a signal of intent.<\/p>\n With Nvidia\u2019s own ability to continue to effectively provide vendor financing for purchases of its chips \u2013 the \u201ccircular financing\u201d arrangements that have been increasingly scrutinised<\/a> and criticised \u2013 perhaps constrained, it wants to enlarge that circle \u2013 and it\u2019s Wall Street\u2019s access to vast pools of private capital that will enable that.<\/p>\n Not that Nvidia won\u2019t contribute. It says it will guarantee 25 per cent of the residual value of the collateral for any project.<\/p>\n For the Wall Street firms, the allure is that it could create a new class of asset-backed securities that they can on-sell to pension funds, insurers, sovereign wealth funds and wealthy investors, clipping the tickets on the way through.<\/p>\n The company refers to those projects \u2013 the chips and data centres and other infrastructure that support the training of AI models \u2013 as \u201cAI factories,\u201d but two-thirds or more of the value of those factories will lie in the value of its own chips. That\u2019s potentially a $US125 billion exposure for Nvidia, its shareholders and creditors.<\/p>\n For Nvidia, the concept is designed to increase the capacity of its non-hyperscaler customers to fund the purchases of its chips.<\/p>\n Sharemarkets and conventional lenders have become warier, and more discerning, about the AI companies they are prepared to back now that the hyperscalers are out-spending their cashflows<\/a> and competing for equity and debt. The cost of equity and debt for the smaller entities is becoming prohibitive.<\/p>\n Related Article For the Wall Street firms, the allure of the concept is that it could create a new class of asset-backed securities that they can on-sell to pension funds, insurers, sovereign wealth funds and wealthy investors, clipping the tickets, naturally, on the way through.<\/p>\n The \u201cAI factories,\u201d are, however, rather different to the asset classes that are usually securitised.<\/p>\n The cash flows from securitised residential and commercial mortgages, or infrastructure assets, or corporate loans are high quality and supported by cashflows and collateral that tend to increase in value over time.<\/p>\n The core assets of the AI factories, the Nvidia chips, have more limited and uncertain lifespans. The income streams they might generate and their value as collateral is less certain, but almost certainly diminishes over time.<\/p>\n There\u2019s a debate about the useful lives of chips<\/a>, given that Nvidia (and others) produces a \u201cnext generation\u201d chip with superior capabilities every two years or so.<\/p>\n Some argue that their value should be fully depreciated over only three to five years. Nvidia says their useful life can be up to a decade.<\/p>\n There\u2019s no doubt, however, that an outdated chip whose use is now to apply the knowledge gained from the training of AI models is less valuable than the latest generation chips being used to train those models.<\/p>\n The decline in value over time \u2013 and the time period is unknowable today \u2013 would erode the value of the collateral, with Nvidia\u2019s guarantee providing the backstop for investors.<\/p>\n What Nvidia and its Wall Street backers are depicting is a form of collateralised debt, with Nvidia holding the \u201cfirst loss\u201d tranche that will be called on if a loan defaults and the rate of chip obsolescence is greater than anticipated.<\/p>\n Wall Street is good at engineering a solution to difficult financial challenges and, faced with funding the biggest investment boom in history, there\u2019s no bigger challenge than supplying the capital to acquire the chips and infrastructure for artificial intelligence.<\/p>\n It\u2019s not just the scale of the demand for capital \u2013 the hyperscalers ( Google, Meta, Amazon, Microsoft, Oracle) alone are investing about $US750 billion, largely in AI, this year and will spend more than $US1 trillion next year \u2013 but the reality is that AI revenue growth is being far outstripped by the growth rate of the spending.<\/p>\n It appears near certain that those hyperscalers, despite their vast legacy cashflows, will all be cash-negative, and more highly leveraged, next year.<\/p>\n Google has raised new equity and most of the big tech companies pursuing AI leadership ambitions have, perhaps for the first time, begun tapping debt markets<\/a>, with about $US350 billion of AI-related bond issues so far this year. Despite the cash from their non-AI businesses, the spreads on those bonds have been blowing out.<\/p>\n Wall Street firms can be ingenious but, as the global financial crisis demonstrated, they sometimes push the risk envelope too far.<\/p>\n Independent AI promoters like OpenAI and Anthropic have raised their capital from private investors and are, like Elon Musk\u2019s SpaceX, planning initial public offerings to access the bigger pool of equity capital in the listed market. Any debt they have raised \u2013 and SpaceX has raised debt \u2013 would be priced as \u201cjunk\u201d and be costly.<\/p>\n At those companies\u2019 rates of investment, however \u2013 and the market\u2019s satiation with all things AI \u2013 the planned listings might provide a bandaid, not a cure, for their financial stress.<\/p>\n At face value, gaining access to the estimated $US22 trillion of private capital could provide the extra funding required, and provide it on more attractive\/less expensive terms than are currently available to individual AI borrowers.<\/p>\n Securitising debts \u2013 packaging up parcels of loans and therefore diversifying the risks \u2013 would create securities with much stronger credit quality than that of an individual AI borrower.<\/p>\n As was discovered in 2008 and the sub-prime mortgage crisis<\/a>, however, bundling poor credits together doesn\u2019t necessarily alter the reality that they are risky loans that could all go south together.<\/p>\n Related Article As the Nvidia chips age, the value of the collateral that the end-investors holding those bundles rely on would be diminishing.<\/p>\n And even that diminished value would be vulnerable as inference chips become increasingly commoditised. That\u2019s the segment of the sector \u2013 the applications of AI \u2013 that China is strategically targeting, with chips whose prices already significantly undercut their US counterparts. The collateral, in the event of a default, could be near-worthless.<\/p>\n The Wall Street firms are no doubt comforted by Nvidia\u2019s guarantee, but the tech giant is at the epicentre of the boom in AI and AI valuations and has \u2013 due to its myriad of circular financing deals in a sector where there are now layers of circularity to financial relationships \u2013 a leveraged exposure to the fate of that boom.<\/p>\n The degree of financial engineering already pervasive in the sector and the extent to which the off-balance-sheet liabilities of AI\u2019s blue-chip companies, estimated at more than $US1.6 trillion, now surpass their debt on the balance sheet, say that all the conventional funding options for AI in the US have been stretched to their limits.<\/p>\n In a sense, the agreement Nvidia unveiled with the Wall Street players underscores how fragile the AI ecosystem now is.<\/p>\n Unable to raise sufficient funds conventionally, the sector is being forced to turn to a bespoke, unconventional, financially engineered structure to try to sustain its insatiable appetite for risk capital.<\/p>\n Wall Street firms can be ingenious but, as the global financial crisis demonstrated,<\/a> they sometimes push the risk envelope too far, with unpleasant consequences.<\/p>\n For an industry already laden with risk, is the creative structure they envisage to fund Nvidia\u2019s customers a step too far?<\/p>\n The Market Recap newsletter is a wrap of the day\u2019s trading. 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Nvidia needs money \u2013 and Wall Street is keen to provide it.Bloomberg<\/p>\n![\"It\u2019s](\"https:\/\/www.newsbeep.com\/au\/wp-content\/uploads\/2026\/08\/29a884c3db38577efc31caaeeaac000ea68bc6cf.jpeg\")
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With Nvidia\u2019s own ability to provide vendor financing for purchases of its chips constrained, it wants to access Wall Street\u2019s vast pools of private capital.Bloomberg<\/p>\n![\"Competition](\"https:\/\/www.newsbeep.com\/au\/wp-content\/uploads\/2026\/07\/1785393373_379_f6f6a92964a1bdc69c369f06c4fd4d2e743fc61c.jpeg\")
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