Key facts
- CoreWeave bonds have seen yields spike and prices tumble into distressed territory.
- The value of some loans for hyperscalers like Meta and Amazon is inching toward distress.
- High-yield spreads on AI-related debt have widened to over 350 basis points.
- Spreads on debt used specifically for data centers have widened to over 400 basis points.
AI debt jitters are spreading on Wall Street as more bonds funding data center projects enter distressed territory. Investors are scrutinizing the large sums of borrowed money used for AI buildouts amid rising yields and falling bond prices.
Chamath Palihapitiya, the billionaire venture capitalist, drew attention to some of CoreWeave's bonds, which have seen yields spike and prices tumble into distressed territory. CoreWeave bonds fell below 80 cents on the dollar on Tuesday, the threshold that marks debt as distressed, and the company's stock plunged 15%. Palihapitiya posted on X that CoreWeave's bond yield had risen to 15.1%, up from 9.6% in June, theorizing that AI is blowing up a private credit bubble.
Tesla CEO Elon Musk replied "Yikes" to Palihapitiya's post, drawing more attention. On Wednesday morning, DA Davidson's Gil Luria, a tech analyst, said on a podcast that CoreWeave stock could fall to $0 if the AI spending boom falters. Later that day, the Financial Times reported that Anthropic brought in $16.8 billion in revenue in the third quarter, a figure that caused unease among investors due to a slowdown from the prior quarter's growth.
The sell-off in chip stocks picked up Thursday morning, with the sector heading for $1 trillion in losses. More tech selling on Friday pushed stocks toward their worst week since July. Price declines in AI debt have been most acute in smaller neocloud companies, but even among hyperscalers, the value of some loans is inching toward distress. The debt issued by Blue Owl and Beignet Investor, the special purpose vehicle backed by Meta, to fund the Hyperion data center, has fallen below 92 cents on the dollar, according to the FT.
A spokesperson for CoreWeave told Business Insider, "We are confident in our backlog which more than supports all of our debt obligations." Distressed debt prices do not necessarily mean companies are in imminent danger of defaulting, as hyperscalers like Meta and Amazon continue to hold investment grade credit ratings. Instead, the declining value on some debt reflects investor concerns about risks associated with big projects, increased supply of bonds, and higher interest rates.
The average dollar price of high-yield data center bonds dropped sharply in September, according to Goldman Sachs, pointing to the spike in rates as well as an uptick in the supply of bonds. Bond yields have surged in the last month, with the 10-year Treasury yield ticking up to 5.12% on Friday and remaining near two-decade highs. Credit spreads on AI-related debt have widened sharply, a sign that investors are pricing in more risk. Spreads on AI-related high-yield debt recently widened to over 350 basis points, while spreads on debt used specifically for data centers widened to over 400 basis points, according to Goldman Sachs.