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The debt market is sending a message to AI data center builders: we’re going to raise the interest rate on your credit card and maybe create a new credit limit.
The analogy was provided by Jefferies’ head of global equity strategy, Christopher Wood, who wrote in a note on Friday: “The best way for the AI capex arms race to end is for credit cards to be scrapped.”
That has not happened, but the credit market has been spooked by the new political landscape – see more hurdles for data centers in Democratic governors in major states, along with Democratic-controlled Congress.
The poster child for debt stress is neocloud Coreweave. The yield on the 2032 bond with a coupon of 9.625% has risen above 16%. Coreweave’s five-year credit default swap rose above 1,289 basis points on Thursday, surpassing its October peak, according to Deutsche Bank. CDS fell 8% on Friday to around 1,155.
“We have a lot of danger from the credit space,” said Jim Reid, Deutsche Bank’s head of global macro and thematic research, in a note on Friday. Debt and equity are now moving more in sync, he added, “so we have to see if credit is ahead.”
Investors are demanding more compensation to secure defaults among companies with the strongest balance sheets and credit ratings, among others Nvidia, Broadcomand Amazon.com.
CDS on Nvidia debt rose 76% last month. Broadcom’s CDS is up 49%, while Amazon has gained 44%. CDS that remains low on an absolute basis; Nvidia’s spread is about 139 basis points, compared to 298 bps for Oracle and about 1,100 for CoreWeave. A large increase from a low starting point does not represent the same credit risk.
Still, the rise in CDS is a sign that markets want more protection against defaults among the biggest and healthiest issuers of debt. And rising CDS leads to higher funding costs.
The market is currently grappling with the prospect that at least some data center spending will be delayed or scrapped in the incoming Democratic governors in Ohio, Texas, and Georgia, three states with large amounts of planned capacity.
The moratorium could affect 45% of planned capacity in the US with a large amount in Texas, according to Goldman Sachs. Texas Governor-elect Gina Hinojosa said she is not opposed to data centers but wants a moratorium until the state legislature provides protections for communities.
None of this means that AI debt financing is collapsing. Goldman counted five AI bond deals totaling $67 billion since Oct. 29, bringing the hyperscaler’s total debt this year to $296 billion. Goldman estimates $440 billion of hyperscaler debt next year, plus an additional $300 billion of project-level issuance between investment-grade and high-yield.
The Trump administration has vowed to support data centers. National Economic Council Director Kevin Hassett told CNBC on Friday that he expects data center growth to continue as forecast, despite the Democratic at-large election win.
What’s next
The big question now is how quickly AI spending will generate enough cash for the hyperscalers to make investors comfortable with their future capex plans. For neoclouds, signs of consolidation or retrenchment in capex could result in fewer or shorter contracts for data center computing or prepaid delays.
Goldman analysts said the hyperscalers collectively reported negative free cash flow in the third quarter as capital spending exceeded operating cash flow.
“Delayed monetization and growth in purchase commitments—which we see as an additional and large use of cash, separate from Capex—are the main risks of issuing more debt, according to market conditions,” according to the bank.
The peak of AI debt issuance may now be closer. Bank of America analysts estimate that AI-related credit issuance will grow 31% from 2026 to 2027, reaching $685 billion, including public and private debt. They then see a 23% drop to $531 billion in 2028.
As for risk? “The downside to this forecast is the potential slowdown in AI infrastructure projects behind the Blue Wave, which will reduce the need for capex and thus the debt financing market,” BofA said in a note.
– CNBC’s Nick Wells and Michael Bloom contributed reporting