CoreWeave Bond Rout Tests Investor Appetite for Financing AI Infrastructure Buildout

A sharp decline in CoreWeave’s bonds this week is emerging as a test of investors’ willingness to keep financing the massive buildout of AI infrastructure, as rising borrowing costs and scrutiny of debt-funded expansion hit the sector, according to Reuters reports.

CoreWeave bonds issued in June at a yield of 9.675% have plunged in value, sending their yield to 15% this week. The selloff in the data center operator’s debt carries more significance than a concurrent rout in its shares because it may signal a broader reassessment of the risks tied to financing AI projects that may take years to generate revenue, analysts and portfolio managers said.

“CoreWeave is absolutely the canary in the coal mine” for a market segment that is coming under more stress, said Max Frumes, global head of disressed and leveraged finance at 9fin, a fintech corporate credit data and analytics company. “This is going to be a turning point in the pricing and availability and structure of credit that’s supporting the AI boom.” Frumes believes other AI-linked debt will follow CoreWeave into disressed territory. “It’s going to get more expensive. There will be a lot more scrutiny and probably some pushback from investors.”

Credit investors said they are already becoming more selective. “We’re definitely taking another look at our exposures across the AI infrastructure space, particularly where the risks are concentrated and whether we’re being adequately compensated for taking them,” said John Han, a portfolio manager at fixed-income asset management firm F/m Investments. F/m’s portfolio contains unsecured CoreWeave bonds in one of its exchange-traded funds, but only because they make up part of the index tracked by the ETF. At their current yields those bonds “certainly deserve another look,” Han said. He generally prefers to invest in high-yield securities via special purpose vehicles that may offer lower yields but also more collateral and less risk.

“The market is being very selective and really singling out anything that has more leverage, and (that may be) in a bit more challenging operating environment,” said Larry Holzenthaler, senior portfolio manager of fixed income at Catalyst funds. To Holzenthaler and other investors, what the markets are witnessing now is an overeaction as sentiment shifts from being overly upbeat to downright bearish. In June, the risks driving the selloff – the sheer size of the funding needs, the leverage, the reliance on outside financing, the risk that the GPUs being purchased for data centers would be obsolete before the new facilities could open – were merely overlooked or downplayed. “A few months ago, I would have said people were just too optimistic around AI,” Holzenthaler said.

Deutsche Bank global head of macro and thematic research Jim Reid sees the market entering a new phase in which debt financing is becoming increasingly important. “As we move to a capex cycle funded out of debt rather than simply free cash flow, we have to increasingly respect the credit price action,” Reid wrote in a recent report. “AI financing costs aren’t dramatic overall, but there are worrying themes at the edges.”

Vanguard bond portfolio manager Brad Collins said assessing AI-related debt has become more challenging as issuers bring increasingly large and varied offerings to market, often forcing investors to make decisions in days or even hours. Rising inflation has pushed financing costs higher overall and fueled concern about what lies ahead for mammoth AI capital spending plans. There is also the growing political controvercy surrounding the construction of data centers.

Even one of the tech sector’s stalwarts allows that the road ahead may be bumpy at times. Dan Ives, partner and technology analyst at Yorkville Ives, an investment firm, estimates that 5% to 10% of planned projects ultimately will not be built. “The growing noise around data center permitting and midterm rhetoric on power prices has given investors another reason to step back,” Ives said.

The CoreWeave bond rout also stoked broader market turmoil on Thursday, as indexes tumbled sharply. Asian stocks rose into the weekend on Friday, with bargain hunters likely leading the buying after the precipitous plunge, Reuters reported. South Korea’s KOSPI was up around 3% following Thursday’s nearly 8% plunge, and Japan’s tech-heavy Nikkei was 1.5% higher after droping some 5% in the prior session. US and European stock futures edged higher.

But the spike in yields to levels associated with disressed debt for the AI cloud provider “is still there,” according to a Reuters Morning Bid note from Kevin Buckland. The note also pointed to reported progres by China’s CXMT on next-gen DRAM architecture that has degarded confidence in established manufacturers such as SK Hynix and Micron. With tech earnings rolling out over coming weeks, analysts expect volatility to stay elevated. Market swings will be further compounded by the picture around interest rates at the US Federal Reserve and other major central banks.

Treasy yields “found a floor” after Thursday’s plunge as investors rushed to the perceived safety of sovereign debt, the note said. US yields had already been unsettled by inflation data highlighting price pressures. Fed Chair Kevin Warsh played his cards characteristically close to his chest in Bangkok on Friday, repeatedly saying he doesn’t prejudge the outcome of policy meetings. Markets currently see about 28% odds for a rate hike at the end of this month. Bank of England Governor Andrew Bailey was a little more direct, saying that soaring energy prices due to the Iran war had so far had limited impact on wider inflation in Britain, but it was too soon to draw firm conclusions.

The selloff in CoreWeave debt comes as the broader AI investment thesis faces increasing scrutiny over its reliance on credit markets to fund capital expenditures. As Deutsche Bank’s Reid noted, “As we move to a capex cycle funded out of debt rather than simply free cash flow, we have to increasingly respect the credit price action.” Whether investors will continue to fund the AI buildout at similar terms may be answered in the coming weeks as earnings season progress and credit markets reprice risk.