The credit pressure on CoreWeave continued to intensify on Thursday, against the backdrop of broader selling of stocks related to AI.
This so-called “neocloud” company incurred debts and assumed obligations of over $51 billion for the expansion of its AI infrastructure. Now, it is facing backlash from stock and bond investors, and concerns in the market about AI overspending and debt levels are growing.
CoreWeave Bond yields continue to climb, with the yield on its bond maturing in 2031 and offering a coupon rate of 9.75% rising to 15.78%. Bond yields move in the opposite direction to bond prices. Meanwhile, the spread on its 5-year credit default swap (CDS, which serves as a default insurance) soared above 1140 basis points at one point, and the latest reading is 1088 basis points, representing a 33% increase from the previous week and a 177% rise from a year ago.
Credit concerns regarding AI stocks are also spreading. The stock price of CoreWeave fell again on Thursday, continuing from the 15.5% plunge on Wednesday.
Other neocloud stocks also faced similar pressure. Nebius fell by 5% on Thursday, and Iren fell by 8%.
Concerns about overspending on AI are also spreading. For example, after a significant sell-off in Korean chip stocks, the stock prices of Micron Technology and UltraMicro Semiconductor (AMD) fell by 4% and 6% respectively.
Despite the steady rise in AI debt concerns, investors have recently become more cautious about the fundamentals of companies that borrow large amounts of funds to purchase chips, build data centers, and rent out computing power.
The credit default swap of CoreWeave is precisely a window through which to observe such pressures.
A credit default swap is a type of contract in which the buyer pays a fee to protect themselves in case the borrower is unable to repay the debt. An widening CoreWeave CDS spread indicates that investors perceive a higher risk associated with that debt.
The trading desk stated that the market is “basically saying ‘no mas’ to AI debts that are not supported by operating cash flows.”
S& P Global Market Intelligence, Executive Director of Fixed Income Pricing, and Gavan Nolan stated that a spread level of 1,000 basis points or more is generally considered a signal of credit stress.
Nolan says that no one questions the legitimacy of the demand for CoreWeave's services, as the company has contracts with all major hyperscale cloud service providers. The question is whether the cash flow will actually materialize in the end.
He said, "Currently, there is clearly a serious negative free cash flow. It indeed needs these cash flows to come in order to truly prove that all of the capital expenditures it is making are reasonable."
"Self-fulfilling prophecy"
According to a memorandum obtained from CNBC, CEO Mike Intrator downplayed market fluctuations on Wednesday.
He wrote, "When you are building a new type of technology company, there will be a period of time when the market misunderstands and behaves irrationally." He also stated, "We are very confident about our backlog of orders, which is sufficient to cover all of our debt obligations."
Deutsche Bank stated in a report on Thursday that the company has an order backlog of over $100 billion, of which about two-thirds come from investment-grade counterparties, including Microsoft, Meta, IBM, and Caterpillar. On Wednesday, the bank reiterated its buy rating for the stock, calling this misalignment an opportunity to buy.
The Global Head of Macro and Theme Research, Jim Reid, stated: "The problem is that such concerns may prove to be a self-fulfilling prophecy and could trigger broader issues in other AI related areas."
A chain reaction may have already occurred. The 5-year CDS spread of Oracle also rose significantly this week, with the latest figure at 288 basis points, an increase of over 12% from a week ago.
Reid said, 'If its BBB rating is downgraded, it could put pressure on investors who only hold investment-grade bonds to sell their holdings.'
