CoreWeave CDS spreads surge to distress levels as AI debt fears mount
CoreWeave five-year credit default swap spreads reached 1,088 basis points on Thursday, a 33% week-over-week increase and 177% higher than a year ago. The spike follows a broader sell-off in artificial intelligence-related equities and debt instruments, with investors growing concerned about the company's heavy reliance on borrowed capital. CoreWeave, a neocloud provider, has accumulated more than $51 billion in debt and obligations to fund its infrastructure buildout. The yield to maturity on its 9.75% bond due in 2031 climbed to 15.78%, reflecting the inverse relationship between bond prices and yields.
CoreWeave five-year credit default swap spreads reached 1,088 basis points on Thursday, a 33% week-over-week increase and 177% higher than a year ago. The spike follows a broader sell-off in artificial intelligence-related equities and debt instruments, with investors growing concerned about the company's heavy reliance on borrowed capital. CoreWeave, a neocloud provider, has accumulated more than $51 billion in debt and obligations to fund its infrastructure buildout. The yield to maturity on its 9.75% bond due in 2031 climbed to 15.78%, reflecting the inverse relationship between bond prices and yields.
Credit default swaps function as insurance contracts against borrower default. Gavan Nolan, executive director of fixed income pricing at S&P Global Market Intelligence, noted that spreads at or above 1,000 basis points generally signal credit distress. Nolan stated that while demand for CoreWeave's services is not in question given its contracts with major hyperscalers, uncertainty remains regarding whether future cash flows will materialize to justify the company's current capital expenditures. The firm is currently experiencing heavily negative free cash flow.
Equity markets reflected similar anxiety on Thursday. CoreWeave shares declined further after a 15.5% drop on Wednesday. Other neocloud stocks also fell, with Nebius down 5% and Iren down 8%. The sell-off extended to semiconductor manufacturers, where Micron Technology shares shed 4% and Advanced Micro Devices shares fell 6% following declines in South Korean chip stocks.
The Evercore ISI trading desk described the market reaction as a rejection of AI debt lacking operating cash flow support. In a memo obtained by CNBC, CoreWeave CEO Mike Intrator dismissed the volatility, stating that the market acts irrationally during periods of technological transition. Intrator expressed confidence in the company's backlog, which he said more than supports its debt obligations.
Deutsche Bank reported in a Thursday note that CoreWeave's backlog exceeds $100 billion, with approximately two-thirds tied to investment-grade clients including Microsoft, Meta, IBM, and Caterpillar. The bank reiterated its buy rating on the stock on Wednesday, characterizing the recent price dislocation as a buying opportunity.
Jim Reid, global head of macro and thematic research at Deutsche Bank, warned that such concerns could become a self-fulfilling prophecy, potentially triggering broader issues across the AI sector. He cited Oracle as an example of spreading stress, noting its five-year CDS spread rose more than 12% in one week to reach 288 basis points. Reid cautioned that a downgrade from Oracle's BBB rating could force investment-grade-only investors to sell assets.