Data center debt yields hit double digits as buyers balk

Credit markets that have funded the artificial intelligence buildout are showing signs of reaching their limit. Yields on bonds and loans tied to data centers and chips are climbing into double digits, and bankers are finding it harder to pass the risk on to insurers and other investors, Bloomberg reported on Wednesday. The worry is no longer only about speculative "neocloud" borrowers. Citadel Securities is warning clients that the largest tech companies could also get caught up, because they are putting their balance sheets behind the projects.finance.yahoo.com

Spreads widen, buyers pull back

All of the more than 30 bankers, money managers and private equity executives Bloomberg spoke with said raising money for data centers has become much harder than it was a few months ago. Investors are uneasy about cancellation rights that let customers walk away if projects run late. That concern grew after Oracle ↗ 0.82% issued a force-majeure notice last month over a New Mexico data center, according to Bloomberg. At least 18 data-center deals in the junk-bond and leveraged-loan markets now carry double-digit yields. JPMorgan Chase ↘ 0.84% and Goldman Sachs The Goldman Sachs Group, Inc. ↘ 0.36% had to offer steeper discounts on a $5 billion loan for Volta Infrastructure Holdings, which pushed its yield above 11%.finance.yahoo.com

Credit default swaps, the contracts lenders use to hedge against losses, have become more expensive for Broadcom ↗ 0.74%, Nvidia ↗ 2.78%, Meta ↗ 0.84% and Oracle, reaching levels typical of junk-rated borrowers. Average yields in Bloomberg's investment-grade technology index have climbed to about 6%. "When you have such a large quantum of debt coming, at some point the challenge could be less about finding an investment-grade backstop, and more about finding the actual buyers," Citadel analyst Tucker Roberts told Bloomberg. Citadel stressed that it is not predicting an imminent credit crunch.finance.yahoo.com

Other large investors are also turning cautious. Oaktree's Armen Panossian said spreads suggest credit markets are "becoming either full, saturated" with AI loans. KKR ↘ 1.85% is reportedly avoiding remote data centers, and Carlyle The Carlyle Group Inc. ↘ 0.65% has passed on several deals, Bloomberg reported.finance.yahoo.com

Moody's flags maturity wall

In a separate report released Tuesday, Oct. 27, Moody's ↘ 1.88% said AI financing is pushing private credit beyond traditional corporate lending. It warned that a wave of loans coming due between 2027 and 2029 will test whether weaker borrowers can refinance at higher rates, Reuters reported. Moody's expects capital spending by the five largest US hyperscalers and CoreWeave ↗ 6.28% to approach $1 trillion in 2027. About 17% of the 607 borrowers it tracks use payment-in-kind interest, which defers cash interest payments but adds to their total debt, according to its findings.kansascity.com+1

The agency also pointed to "circular" financing, in which tech companies, chipmakers and AI developers invest in, lend to and buy from one another. Those linked exposures could weaken together in a downturn, The Herald Business noted. "Who wants to step in front of that?" asked MetLife Investment Management's John Yovanovic, describing deals likely to trade below par in the near term.biz.heraldcorp.com