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AI Boom Fears Spark Investor Flight to Safety
16 Oct
Summary
- Investor anxiety over AI scaling costs drives demand for credit default swaps.
- CoreWeave's debt protection costs surged to $100,000 from under $40,000.
- Oracle's New Mexico data center project faces setbacks and lease deferrals.
Growing investor unease surrounding the significant capital investment and uncertain revenue timelines for artificial intelligence is prompting a defensive strategy. This sentiment has led to a surge in demand for credit default swaps, essentially insurance against corporate defaults.
The cost of these financial instruments, particularly for hyperscalers with substantial debt, has risen sharply. For instance, CoreWeave, a cloud provider, has seen its debt load triple over the past year. The expense to insure $1 million of its bonds against default has climbed from under $40,000 a year ago to $100,000 today, with yields on its debt now exceeding 15%.
Oracle is also facing increased hedging costs, with a 12% weekly rise for a $1 million policy. Investor concerns are partly linked to a data-center project in New Mexico that has encountered setbacks. The company has informed lenders of potential lease payment deferrals if the data center, slated for 2028, experiences further delays, compounded by existing regulatory hurdles.
This cautious market sentiment is impacting new debt deals, with a recent Volta Infrastructure deal faltering as investors demanded higher yields for data center debt. Companies have issued record amounts of debt to fund AI infrastructure, but issuance has slowed recently amid rising interest rates and increased investor selectivity.
