CoreWeave’s Debt Insurance Costs Just Hit a Record. Can It Keep Funding Its AI Boom?

CoreWeave, a major player in the neocloud industry that supplies computing power for artificial intelligence (AI), finds itself in hot water as the cost of insuring its debt has hit an all-time high. Investors are growing increasingly concerned that the company may default on its obligations. On Thursday, the spread on its five-year credit default swaps (CDS) hit a record 1,038 basis points, a 164% increase from the previous year.

A CDS is an insurance contract that protects buyers from potential losses if a borrower defaults on its debt. The rising cost of this insurance highlights the market's growing unease about CoreWeave's financial health. The company is carrying a staggering $51 billion in debt and lease obligations, which is a significant burden for a firm that is still operating at a loss.

Last quarter, CoreWeave reported a net loss of $626 million, up from $290 million the year before. Its cash flow situation worsened as well, with capital spending rising to $6.4 billion, pushing free cash flow to negative $5.7 billion. With this financial strain, it becomes increasingly likely that CoreWeave will need to seek more funding to keep its operations afloat.

If it struggles to secure additional financing, the risk of a default grows as lenders demand higher rates to compensate for the elevated risk. CoreWeave's growth, which saw revenue reach $2.58 billion in the latest quarter, is undoubtedly impressive. However, converting its $104 billion backlog of promised revenue into actual earnings will prove challenging and becomes harder as its debt costs rise.

The company's reliance on debt and potential default risk have led to a financial tightrope act that leaves little room for error. As the market increasingly questions the sustainability of CoreWeave's business model, it remains to be seen if the company can keep its growth engine running without succumbing to financial turmoil.