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Debt markets are sending a message to AI data center builders that they are raising interest rates on credit cards and potentially putting new limits on credit limits.
The analogy comes courtesy of Christopher Wood, global head of equity strategy at Jefferies, who wrote in a note Friday: “The most likely way the AI capital investment race ends is for credit cards to be taken away.”
That hasn’t happened yet, but credit markets are spooked by the new political landscape, with Democratic governors in key states and Democratic-controlled legislatures that have further raised hurdles for data centers.
Neocloud is a representative example of debt stress. coreweave. The yield on the 2032 bond with a coupon of 9.625% exceeded 16%. Coreweave’s five-year credit default swaps surged more than 1,289 basis points (bp) on Thursday, expanding beyond its October peak, Deutsche Bank said. CDS fell 8% on Friday to about 1,155.
“There have been a number of warnings from the credit space,” Jim Reid, global head of macro thematic research at Deutsche Bank, said in a note Friday. He added that debt and equity are now moving more in tandem, “so we’ll have to see if credit moves further.”
Investors are demanding more compensation as insurance against default, even from companies with the strongest balance sheets and credit ratings. Nvidia, broadcomand Amazon.com.
Nvidia corporate bond CDS rose 76% last month. Broadcom’s CDS rose 49% and Amazon’s rose 44%. Their CDS remains low on an absolute basis. Nvidia’s spread stood at roughly 139 basis points, compared with about 298 bps for oracle For CoreWeave it’s about 1,100. A large increase from a low starting point does not imply the same credit risk.
Still, the rise in CDS suggests the market wants more protection against default even by the largest and healthiest bond issuers. And a rise in CDS means higher funding costs in the future.
The market is currently grappling with the prospect that at least some data center spending will be deferred or eliminated under the next Democratic governor in three states with much of the planned capacity: Ohio, Texas and Georgia.
Moratoriums could impact 45% of planned capacity in the US with a large amount of that 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 passes community protections.
None of this means that AI debt financing is doomed. Since October 29, Goldman has tallied five AI bond trades totaling $67 billion, bringing total hyperscalar bond issuance this year to $296 billion. Goldman expects $440 billion in hyperscalar corporate bond issuance next year, with an additional $300 billion in issuance at the investment grade and high-yield project level.
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 expected despite Democrats’ landslide electoral victory.
what happens next
The big question now is how quickly AI investments will generate enough cash for hyperscalers to give investors confidence in their future capital spending plans. For neoclouds, any signs of consolidation or reductions in capital expenditures could result in reductions or shortening of data center computing contracts or delays in upfront payments.
Goldman analysts said hyperscalers reported negative free cash flow in the third quarter as capital spending outpaced operating cash flow.
“Delays in monetization and increased purchase commitments, which we view as an additional and significant use of cash separate from capital expenditures, represent a key risk to further debt issuance, depending on market conditions,” the bank said.
The peak of AI-driven bond issuance may be just around the corner. Analysts at Bank of America predict that AI-related credit issuance will increase by 31% from 2026 to 2027, reaching $685 billion, including public and private debt. After that, it is expected to decline by 23% to $531 billion in 2028.
What about risks? “There is a downside to these forecasts, as the impact of the blue wave could slow AI infrastructure projects, which would reduce demand for capital investment and reduce debt market financing,” BofA said in a note.
-CNBC’s Nick Wells and Michael Bloom contributed reporting.
