Financing Risks Becoming The Latest Red Flag for the AI Boom
Following our recent warnings regarding the mounting structural headwinds facing the AI sector, financing is rapidly emerging as a new and potentially systemic risk. The reality of this financing crunch is becoming impossible to ignore.
We have long warned that the neoclouds were the canary in the coal mine for the AI boom. Bonds of neocloud provider CoreWeave have sunk to levels signalling distress, reflecting growing investor anxiety over whether future AI revenues can possibly justify the sheer volume of capital being poured into computing capacity. With close to $600bn of debt already issued this year to finance AI projects, it seems to us that the market is finally having digestion issues. The gap between spending today and returns tomorrow is getting much harder to overlook. The extent of this sudden risk aversion by market participants was evident in US Treasuries, which rallied strongly this week despite hotter inflation gauges and rising oil prices.
The most glaring red flag comes directly from the frontier labs themselves and the aggressive financial engineering used to secure capital. As the Weekend FT noted, Anthropic has managed to secure a double B plus issuer rating—the highest speculative-grade score—from Kroll Bond Rating Agency in the run-up to its $35 billion chip financing led by Apollo. What makes this deeply concerning is that this near-investment-grade rating was granted despite Anthropic providing strictly limited financial disclosures that conveniently excluded critical metrics like free cash flow and EBITDA.
The reported aggressive lobbying by Wall Street banks to secure favourable ratings from this smaller agency to lock in better borrowing terms carries dark echoes of the Global Financial Crisis. The practice of paying rating agencies to rubber-stamp high-risk debt with premium grades was the exact catalyst that brought the financial system to its knees. Anthropic expects to spend over $500 billion on computing resources over the next decade, and Wall Street is currently assembling an additional $60 billion debt package to fund its custom AI chips.
About $4.4 billion of the junior debt in the recent package exposed lenders directly to Anthropic’s credit risk, yielding an elevated 8.5 percent. Further reports indicate Anthropic is offering private equity giant Blackstone a double-digit yield exceeding 10 percent to secure additional junior debt. Offering venture-like returns on debt just to finance basic compute procurement underscores the desperate liquidity position of these upstarts.
Startups like Anthropic and OpenAI lack mature cash-generating operations or other notable revenue streams to help finance their massive capital expenditures. They seem trapped between rising borrowing costs, a 20 percent plus secular inflation running through the physical AI supply chain which is eating into their huge spending budgets, and collapsing end-product pricing driven by Chinese open-source models. Combined with growing product liability risks that threaten to stall frontier model launches and intensifying political opposition to data centre buildouts, the current spending trajectory strongly validates our thesis of a major slowdown.
From a portfolio perspective, we think no other Japanese firm looks as exposed to this bubble bursting than SoftBank (9984). It has made the biggest bets yet on these elevated valuations to continue inflating, and it remains our highest conviction short sell pick as it has been throughout this year. Furthermore, we think that banks and securities firms that have strongly benefited from this boom look highly exposed as capital markets ructions continue.
