CoreWeave Shares Drop Amid Rising Debt Risk Concerns

The author argues that concerns about CoreWeave's debt risk explain the sharp decline in CoreWeave shares, even though an actual default might never happen. CoreWeave shares lost a quarter of their value since last Friday's close. CoreWeave shares plunged nearly 12% on Friday. CoreWeave shares declined every day this week except Thursday. Fears that CoreWeave's debt stress may signal broader problems with borrowing-funded artificial intelligence infrastructure investment hit technology stocks this week. The Nasdaq recorded a weekly loss of 4.5%.

The yield on a CoreWeave bond maturing in 2031 almost reached 16% this week. The bond yield stood around 14.5% on Friday. CoreWeave issued the bond in April at a 9.75% yield. CoreWeave's five-year credit default swaps exceeded 1,000 basis points. The credit default swaps rose nearly 19% this week. The credit default swaps were 178% higher than 12 months ago. Bloomberg puts the implied probability of a CoreWeave default within the next five years at around 60%, based on credit default swap trading.

Credit default swaps allow debt holders to protect against losses resulting from an issuer's default. Credit default swap premiums depend on the value and quality of the insured asset. A quote above 1,000 basis points puts the annual cost of insuring $1 million of CoreWeave debt above $100,000. Investors can also buy and sell credit default swaps without owning the underlying debt to speculate on changes in a company's credit quality.

Bond yields reflect default risk as well as inflation expectations, liquidity premiums and the risk-free rate. The 10-year Treasury yield, commonly used to measure the risk-free rate, is currently nearly 5.1%. However, credit default swaps reflect credit risk without those other factors. The author argues that credit default swaps therefore offer a more transparent view of investors' assessments of an issuer's debt. Corporate credit quality is attracting attention as persistent above-target inflation raises funding costs and investors question companies' financial commitments to AI investment.

The author argues that rising credit default swap prices provide a real-time, quantifiable indicator of increasing perceived default risk. The author warns that equity value generally falls sharply long before a default occurs. Credit default swap prices are not official credit ratings of the kind issued by S&P Global, Moody's or Fitch. The author argues that frequent credit default swap pricing can be more useful to stock investors seeking to understand market and individual stock movements.

However, Nvidia CEO Jensen Huang said on Thursday that CoreWeave's financial position was stable and "improving every day." Huang made the comments at an event in Stockholm. Huang's comments were credited with reversing earlier losses in CoreWeave shares on Thursday and helping the shares close higher. Nvidia is a major CoreWeave shareholder. CoreWeave uses Nvidia chips to provide AI computing services to clients. Huang said Nvidia did not need to provide financial support to CoreWeave because CoreWeave's cost of capital was decreasing.

The author recommends monitoring credit default swap trading as AI investment develops. The author argues that movements in credit default swap prices can show whether perceived default risk is rising or falling. The author does not consider credit default swap rates on the author's portfolio companies concerning at present, despite increases associated with funding initiatives. The author argues that the future direction of those rates will likely determine movements in those companies' share prices.