The cost of protecting against defaults among United States technology companies has climbed to record highs, offering the clearest signal yet that credit stress is building within the artificial intelligence trade, particularly for data centre operators whose business models depend heavily on future revenue materialising as expected. Hotter than anticipated inflation figures, combined with growing expectations that interest rates will remain elevated for longer, are colliding with persistent doubts about how quickly the enormous sums being poured into artificial intelligence will actually translate into profits, and whether companies carrying heavy debt loads can generate returns fast enough to keep servicing their interest obligations.
Credit default swaps, which function as insurance against a borrower failing to meet its obligations, are flashing warning signs across the sector. Five year credit default swap spreads at cloud computing giant Oracle were quoted at 288 basis points, unchanged from the previous close but noticeably wider than the 260 basis points recorded just a week earlier. Spreads for artificial intelligence investor SoftBank widened by 24 basis points to reach 424 basis points. The most dramatic movement came from data centre operator CoreWeave, whose credit default swaps have blown out past 1,000 basis points according to data compiled by financial information providers. The loss making neocloud company, which carries nearly fifty billion dollars in debt, finds itself at the centre of the storm. Its debt prices are tumbling, with paper maturing in 2032 changing hands at around seventy eight cents on the dollar for a yield of just over sixteen percent.
Kathleen Brooks, research director at XTB, offered a blunt assessment of the situation. “CoreWeave is quickly becoming the AI trade’s canary in the coal mine,” she said. “Its bonds have sold off sharply, this is a sign that investors might be going off the AI investment narrative, which has included massive debt issuance to fund AI ambitions.” The widening of credit default swap spreads reflects how the market prices the likelihood of a credit event, with the 1,000 basis points for CoreWeave implying a risk of default within the coming five years of nearly sixty three percent, a substantial increase from around thirty percent a year ago.
A surge in quarterly revenue from artificial intelligence developer Anthropic did little to calm the market’s nerves. According to an investor who attended a pre initial public offering meeting with the company’s leadership in San Francisco on Wednesday, third quarter revenue rose forty five percent to 16.8 billion dollars from the previous quarter. Anthropic is reportedly targeting a valuation of two trillion dollars. Even this impressive growth trajectory failed to offset the broader anxiety permeating credit markets. Earlier in the week, Broadcom chief executive Hock Tan compared the investor rush for anything related to artificial intelligence to casino gambling, a remark that resonated with those already uneasy about the sustainability of current valuations.
CoreWeave stock fell another 6.8 percent in early premarket trading on Thursday, following a fifteen percent slide during regular hours on Wednesday that was itself followed by a six percent drop in after hours trading, collectively vaporising around a fifth of the company’s value. CoreWeave shares have declined over eight percent this year, while those of rival Nebius, for which there are no publicly tradable credit default swaps, are up approximately one hundred and twenty percent. Credit default swap spreads for Amazon, Alphabet, Meta, and Nvidia also traded at record highs, though they have risen far more slowly than those of Oracle or CoreWeave, suggesting that the market distinguishes between the hyperscalers with diversified revenue streams and the more speculative players whose fortunes are tied almost entirely to the artificial intelligence buildout.
The divergence between the performance of CoreWeave and its larger, more established peers raises a question that investors will need to confront as the year progresses. The artificial intelligence trade has been driven by a compelling narrative about transformative technology and enormous addressable markets, but narratives alone do not service debt. If the revenue growth that companies like CoreWeave have promised fails to materialise on the timeline investors expect.
