DataCenter Risk Is the Real Thing: CHART OF THE DAY
Spreads on financing the datacenter buildout are still small enough not to seriously discourage it, but large enough to reveal that the financiers are getting nervous about a non-zero chance of a big-deal default on their loans:
Torsten Slok: Hyperscaler CDS Widening Is Not a Dealer Inventory Story <https://www.apollo.com/wealth/insights-news/insights/daily-spark/hyperscaler-cds-widening-is-not-a-dealer-inventory-story>: ‘The widening in hyperscaler CDS is not driven by dealer hedging of new issuance.If it were, bank CDS would be widening too, given that banks remain the single largest source of IG supply, and instead bank spreads have sat flat near 40 bps. What the market is repricing is hyperscaler credit fundamentals, namely a debt-financed AI capex cycle with rising leverage, negative free cash flow and uncertain payback on depreciating assets:
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Brad DeLong here: One thing that might be going on here: The usual default math assumes debtors want to pay. But founder-controlled firms with a “you lent us too much” attitude introduce a strategic-default option that standard systems of ratings do not fully capture. Several of these issuers have exactly the kind of principals who would treat a contractual obligation as a negotiating position. At the moment the spreads are only 0.6%-point, still small change, especially in the context of DataCenter builders who are looking forward either to extraordinary wealth or to the protection of their current flow of platform-monopoly profits. These spreads are not doing much to discourage the boom. But they do show that market opinion is nervous. And when market opinion is nervous, it might turn and collapse the boom at any moment.
The depreciation schedules on AI hardware are the potential jokers in the deck. If the useful life of an NVIDIA H100-vintage cluster turns out to really be three years rather than six, the capex cycle’s economics invert, and the leverage that looked prudent looks reckless.
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