By Tom Westbrook and Amanda Cooper
SINGAPORE/LONDON, Oct 15 (Reuters) - The cost of insuring against US tech defaults hit record highs on Thursday, in the latest sign of credit stress building in the AI trade, especially for data centres that are dependent on future revenue.
Hotter-than-expected US inflation data, together with mounting expectations for higher interest rates, are colliding with concern about how quickly massive investment in artificial intelligence will translate into profits, as well
as whether heavily indebted companies can generate returns fast enough to service mounting interest costs.
Credit default swaps (CDS) are sending a warning signal to markets.
Five-year credit default swap spreads at cloud computing giant Oracle were quoted at 288 basis points on Thursday by S&P Global Market Intelligence. They were unchanged from the previous close, but up from 260 bps a week earlier.
Five-year spreads for AI investor SoftBank widened 24 bps to 424 bps.
Data-centre operator CoreWeave's CDS have blown out past 1,000 bps, S&P LSEG data showed.
The loss-making "neocloud" company that owes nearly $50 billion, according to LSEG data, is in the eye of the storm.
Its debt prices are tumbling, with 2032 paper changing hands at around 78 cents on the dollar, for a yield of just over 16%, on the Tradeweb platform.
"CoreWeave is quickly becoming the AI trade’s canary in the coal mine," said Kathleen Brooks, research director at XTB.
"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."
A surge in quarterly revenue from AI developer Anthropic did little to calm the market's nerves.
According to an investor who attended a pre-IPO meeting with the company's leadership in San Francisco on Wednesday, third-quarter revenue rose 45% to $16.8 billion from the previous quarter. Anthropic is targeting a valuation of $2 trillion.
DEBT MARKET JITTERS
CDS spreads show the number of basis points charged for default protection. The greater the perceived risk of a credit event, the wider the spread, meaning the 1,000 bps for CoreWeave CDS implies a risk of default in the coming five years of nearly 63%, up from around 30% a year ago.
Earlier this week, Broadcom Chief Executive Hock Tan compared the investor rush for anything AI-related to "casino gambling."
CoreWeave stock was down another 6.8% in early premarket trading on Thursday, following a 15% slide during regular hours on Wednesday that was followed by a 6% drop in after-hours trading, which has vaporised around a fifth of the company's value.
CoreWeave shares have fallen over 8% this year, while those of rival Nebius, for which there are no publicly tradable CDS, are up about 120%.
Credit default swap spreads for Amazon, Alphabet, Meta, and Nvidia also traded at record highs, data from LSEG and S&P Global Market Intelligence showed, though they have risen far more slowly than Oracle, or CoreWeave.
(Reporting by Tom Westbrook in Singapore and Amanda Cooper in London; Editing by Christopher Cushing, Shri Navaratnam, Dhara Ranasinghe and Thomas Derpinghaus)
