Credit Risks Rise for Companies Building AI Infrastructure

The market is reassessing the credit risks of companies building AI infrastructure

The cost of credit default swaps for a number of US technology companies has reached record levels amid growing investor concerns about the return on investment in artificial intelligence. Data centre operators and highly indebted companies, which are counting on further growth in demand for computing power, are feeling the most significant pressure.

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According to Reuters, Oracle’s five-year credit default swap (CDS) spread has risen to 288 basis points, SoftBank’s to 424 points, whilst that of data centre operator CoreWeave has exceeded 1,000 points.

Debt financing for AI is becoming more expensive

A credit default swap is a financial instrument that protects a creditor against certain risks of default on debt obligations, the publication explains. A rise in its cost usually reflects an increase in the credit risk perceived by the market.

CoreWeave – a company providing computing power for AI applications – has attracted particular attention from investors. According to LSEG data cited by Reuters, its debt stands at nearly $50 billion. At the same time, the company remains loss-making, and the value of its debt securities is falling.

CoreWeave’s shares fell by 15 per cent on Wednesday, 14 October, and dropped a further 6 per cent after the market closed. Consequently, the decline over this period amounted to around one-fifth of the shares’ value.

Investors are looking for a return on their AI investments

The market assesses not only the prospects for technological developments, but also companies’ ability to service their growing debts. The construction of data centres, the purchase of computing accelerators and the development of cloud infrastructure require significant capital even before the investments begin to generate a steady return.

As Reuters notes, the rise in the cost of credit protection is linked to doubts about how quickly investments in AI will turn a profit and be able to cover rising interest costs.

This is a particularly important issue for data centre operators. Their business depends on demand for computing power, long-term contracts with clients, the cost of equipment and the terms of financing. If revenues grow more slowly than expected, debt servicing could become an additional source of pressure.

That said, a widening of credit spreads does not in itself mean that a company’s default is inevitable. This indicator reflects market participants’ assessment of risk, rather than an actual breach of obligations.

What this means for the technology sector

The situation shows that the artificial intelligence boom is facing not only technological constraints but also financial ones. As investment in computing infrastructure increases, the cost of debt and project payback periods become increasingly significant.

For investors, this reinforces the need to distinguish between companies that are already generating sustainable revenue from AI and businesses whose financial model depends heavily on future demand.

The current situation indicates that the market is placing greater demands on the financial stability of the AI industry. Another key indicator is the ability of technology companies to demonstrate the expected return on capital expenditure through actual revenue.

This story was translated with the assistance of artificial intelligence.The translation was also reviewed by the Logos Press editorial team.

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