The cost of insuring against AI company defaults spikes

Investors are increasingly seeking to protect themselves against potential defaults in the rapidly growing artificial intelligence (AI) sector, leading to a sharp rise in the cost of credit default swaps tied to major AI companies. These insurance contracts, which act similarly to paying a premium on an insurance policy, are becoming a popular way for investors to hedge their bets.

The cost of protecting against defaults on hyperscalers, or large cloud computing providers, has surged the most. This includes cloud providers such as CoreWeave, whose debt load has tripled over the past year, and Oracle, which has a debt load of $160 billion that is nearing junk-rated status. The cost to insure $1 million of CoreWeave's bonds against the risk of default has increased from under $40,000 a year ago to $100,000 today.

Additionally, Oracle's credit default swap costs have risen 12% in a week, with a $1 million policy now costing $28,000.

The heightened concern over Oracle's financial stability is partly due to a data-center project in New Mexico that has encountered setbacks. The company recently informed one of its lenders, Blue Owl, that it would defer lease payments and other financial obligations tied to the project if the datacenter fails to come online as planned in 2028. Oracle still has to pay some interim costs and the rent for the space.

New debt deals for AI-related companies have become increasingly difficult to secure. This week, a deal for Volta Infrastructure fell through as investors with ample exposure to data center debt demanded higher yields. Credit default swaps, a financial engineering tool, allow investors to protect themselves against potential defaults, compensating the buyer if something goes wrong.

Despite investors' efforts to protect themselves, record amounts of debt have been issued over the past year as companies strive to rapidly build the infrastructure and compute capacity needed to support the AI boom. However, this issuance has slowed in recent months as interest rates rise and investors become more selective about whom they lend to.