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<\/p>\nThe cost of insuring against a big technology firm defaulting on its debt has soared to record highs.<\/p>\n
These contracts are known as credit default swaps.<\/p>\n
Heavily indebted data centre operator CoreWeave has been among the hardest hit.<\/p>\n
Investors who lent the company money are now paying a lot to buy these credit default swaps to insure against losing their investments if the company defaults.<\/p>\n
The so-called neocloud company has taken on more than $US50 billion ($72 billion) in debt.<\/p>\n
The yield on CoreWeave bonds maturing in 2031 has hit 15.78 per cent.<\/p>\n
This week, the spread on its five-year credit default swaps soared 16 per cent to a record 1.14 per cent, before easing slightly to 1.03 per cent.<\/p>\n
Floodlines Research founder Anna Wu said the record highs in tech credit default swaps were an extension of CoreWeave’s spreads blowing past 1 per cent.<\/p>\n
“[It] has revived worries about how the AI build-out is being financed,” Ms Wu said.<\/p>\n
Turning to private credit<\/p>\n
Wall Street’s big tech firms are increasingly turning to debt and private credit financing, having exhausted options to raise money in the share market.<\/p>\n
But elevated global inflation is putting upward pressure on interest rates, which is increasing the cost of this debt.<\/p>\n
Competition for debt from governments and other big tech firms is also increasing interest rates, and the cost of servicing this debt.<\/p>\n
Investors are increasingly concerned that debt costs are rising too much for big tech firms to service, and they are buying insurance to prevent harmful financial losses.<\/p>\n
Ms Wu conceded financial markets were growing more anxious about these mammoth companies’ financial health.<\/p>\n
“Nvidia’s Jensen Huang defended CoreWeave in Stockholm yesterday, saying its cost of capital is falling and it needs no Nvidia backstop, but I think investor sentiment on tech is fragile after the chip sell-off, so this is more sentiment than fundamentals for now,” she said.<\/p>\n
Elsewhere in the market cloud \u2060computing giant Oracle has seen its credit default swaps rise 0.3 per cent this week, while costs to insure against debt defaults for Nvidia, STMicroelectronics and SpaceX also rose sharply.<\/p>\n
Credit default swap \u2060spreads 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.<\/p>\n
<\/p>\n
Jensen Huang has defended CoreWeave’s debt levels, saying its cost of capital is falling. (Reuters: Evan Vucci)<\/p>\n
“This is not the first time we’ve had a sizeable market wobble on the back of AI fears, \u2060but 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,” Deutsche Bank strategist Jim Reid said.<\/p>\n
“AI financing costs aren’t dramatic overall, but there are worrying themes at the edges.”<\/p>\n
Canary in the coalmine<\/p>\n
Marcus Today senior markets analyst Henry Jennings described CoreWeave as the “canary in the coalmine” for excessive big-tech debt on Wall Street.<\/p>\n