Investors seeking protection against a potential downturn in the AI boom are driving up the cost of credit default swaps tied to hyperscalers. Investors are buying the insurance contracts amid growing concern about the capital needed to expand artificial intelligence and how quickly revenue will support that spending. Protection costs are rising most for hyperscalers with the largest debt loads, including CoreWeave and Oracle.
Cloud provider CoreWeave's debt load has tripled over the past year. Five-year protection against a default on $1 million of CoreWeave bonds now costs $100,000, compared with under $40,000 a year ago. CoreWeave bond prices fell sharply this week, pushing yields above 15%. CoreWeave's CEO sent employees a memo saying the market was acting "irrationally."
Oracle has a $160 billion debt load rated just above junk status. The cost of protection against an Oracle default rose 12% in a week, with a $1 million policy now costing $28,000. Part of investors' concern about Oracle relates to setbacks at a data center project that Oracle is building in New Mexico.
Oracle informed a lender last month that Oracle would defer lease payments and other financial obligations tied to the project if the data center fails to open as planned in 2028. Blue Owl is among the lenders. The project has already faced regulatory obstacles and local opposition. Oracle still has to pay some interim costs and rent for the space.
Blue Owl CEO Doug Ostrover said on a recent episode of Compound Interest that investors can use the derivatives market to bet that Microsoft could default and fail to pay rent. Ostrover said Blue Owl does not make that bet, although the option is available to Blue Owl.
New debt deals are also struggling. A deal for Volta Infrastructure faltered this week as investors, reluctant to take on more data center debt, demanded higher yields.
AI Company Default Insurance Costs Rise Amid Market Concerns
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Summary
Altcoins to watch are drawing attention as fear and greed index readings show growing unease in markets. Investors are buying more credit default swaps to protect against possible defaults by AI-focused hyperscalers, with worries about capital needs and revenue growth. CoreWeave and Oracle are seeing sharp rises in protection costs. CoreWeave’s five-year protection for $1 million of bonds now costs $100,000, up from under $40,000 a year ago. Oracle’s protection costs jumped 12% in a week to $28,000. Oracle’s New Mexico data center project has also raised concerns.
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