US$70 billion in ‘phantom liabilities’: Why bond traders are worried about AI firms’ credit backstops
How should investors gauge the probability that these off-balance-sheet contingencies will turn into on-balance-sheet problems?
Investors are growing concerned about the potential risks associated with the $70 billion in "phantom liabilities" that major AI companies face, despite not appearing on their balance sheets. Nvidia recently announced a $500 billion financing partnership, which has raised questions about the use of credit backstops to support debt deals tied to AI expansion. These backstops could provide tens of billions of dollars in support, allowing firms to rely on Nvidia's strong credit rating to contain customer costs.
Meta Platforms, which first implemented this structure for its data centers, uses a "residual value guarantee" term to describe the backstop. The company notes that the payments are "not probable," so no liability has been recorded. However, the possibility of such contingencies being utilized has led investors to scrutinize past deals for clues on how Nvidia might structure its agreements.
Typically, these backstop arrangements involve a special-purpose vehicle borrowing money to purchase chips, backed by the cash flow from a contract with a customer using the technology. If the firm stops paying, the assets can be leased out again or sold to pay back the remaining debt. If there is still a shortfall, the backstopper compensates for the difference.
While proponents argue that demand for chips will outstrip supply for years, making the risk remote, rating agencies are not ruling out the use of these backstops. Investors are urging caution over the risks accumulating off balance sheet. The use of these backstops could force chipmakers to honor billions in pledges during potential industry downturns.
Nvidia's CEO, Jensen Huang, mentioned that the company may provide up to 25% residual-value support for opportunities, assessed on a case-by-case basis. He emphasized that their role is to unlock a large pool of independent capital while maintaining disciplined risk exposure. The arrangement is designed to alleviate circular financing concerns by bringing in outside capital and promoting investment-grade ratings at lower borrowing costs.
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