CoreWeave's debt is becoming the whole AI industry's problem

CoreWeave has had a rough week. Its bonds slipped into distressed territory — which, by a common definition, happens when investors demand 1,000 basis points more in yield than they would get from government debt. Last Tuesday Chamath Palihapitiya, the self-styled "SPAC King," pointed this out, while also asking whether the entire AI buildout is a private-credit bubble. Since that day's close the stock is down more than 20 percent — a fairly big move. Other AI names took some collateral damage too.

The author has asked the bubble question herself. But when the "SPAC King" voices the same doubts, the signal is different: it's one thing for an ordinary observer to say "yikes," and quite another when the figure doing it is someone of Elon Musk's stature.

Talking about insurers' money

Matters got worse thanks to cofounder Brannin McBee. He told the Financial Times — on the same day as Palihapitiya's post — that CoreWeave wants to move its debt from junk to investment grade so it can borrow from insurers, whose capital is, in his words, "unlimited." That isn't unreasonable in itself: earlier this year the company secured its first investment-grade chip loan. But talk of reaching for insurers' vast pools of money frightens investors, who fear that an already massive debtor intends to borrow even more.

"The problem is not that credit profiles have changed in the last year, it's that we've got another year and a half of supply coming," Bloomberg quoted John Yovanovic of MetLife Investment Management as saying.

Why it isn't doom yet

A plunging share price is not necessarily financial collapse: a stock reflects confidence in a company's future, not its day-to-day business. But CoreWeave carries very expensive debt — more than $35 billion as of the second quarter — and if that debt gets dearer, turning a profit gets harder still. The company pioneered using GPUs as loan collateral, and it lost more than a billion dollars in the first half of the year.

What saves it are customer remaining performance obligations: $103.7 billion of them, roughly 40 percent due in 2028, and the contracts are nearly impossible to cancel. Its biggest clients are Microsoft, OpenAI, and probably Nvidia (the third isn't disclosed); together they supplied almost three-quarters of quarterly revenue. As long as CoreWeave keeps paying its debt, the music keeps playing.

Meanwhile the jitters have spread. Oracle's shares fell almost 10 percent over the same stretch, and its bonds sold off too. These worries apply to all neoclouds — the bare-metal business just may not be a good one. Even so, some people are buying the dip.

Source: The Verge