CoreWeave’s debt is becoming the whole AI industry’s problem

CoreWeave experienced a difficult week, with its bonds falling into distressed territory. This led to Chamath Palihapitiya, also known as "SPAC King," questioning whether the AI buildout represents a private credit bubble. CoreWeave's shares have dropped over 20 percent since Tuesday's close, causing some market ripple effects. The situation has raised concerns about the broader AI industry and its potential for a bubble.

CoreWeave's founder, Brannin McBee, revealed that the company aims for its debt to be investment-grade, allowing it to borrow money from insurers with virtually unlimited capital. However, this move has led to fears that CoreWeave may borrow even more. The chief issue is not a change in credit profiles but the impending supply of debt.

Bloomberg quoted John Yovanovic, co-head of leveraged finance at MetLife Investment Management, as stating that the problem lies in the upcoming debt. CoreWeave's total debt exceeds $35 billion, primarily due to its pioneering use of GPUs as collateral for loans and its lack of a profitable business model. Investors are worried about the company's heavy debt load, which could make it even harder for CoreWeave to turn a profit.

The company's remaining performance obligations from customers amount to $103.7 billion, with about 40 percent due in 2028. Key customers like Microsoft, OpenAI, and Nvidia account for nearly three-quarters of CoreWeave's revenue. While Microsoft and Nvidia are likely reliable, OpenAI's financial situation is less certain. As long as CoreWeave can manage its debt repayments, the business may continue to operate.

However, the broader AI industry remains uncertain, and only time will tell if CoreWeave's business model can succeed in the long run.