The cost of insuring against AI company defaults spikes

CoreWeave and Oracle are seeing higher costs for credit default swaps, which act like insurance against missed debt payments. The increase is strongest for companies carrying very large debt loads. Investors are questioning whether AI revenue will arrive quickly enough to support the infrastructure spending now underway.

CoreWeave’s debt load tripled over the past year. Its five-year default protection rose from under $40,000 to $100,000 annually for each $1 million of bonds. Oracle has about $160 billion of debt, close to junk-rated status. Its protection cost rose 12% in one week, reaching $28,000 for $1 million.

The broader market is also becoming more selective. Rising interest rates and concern about data-center projects are making lenders demand more compensation. New debt deals, including Volta Infrastructure’s, are struggling as investors feel full-up on data-center debt.

A credit default swap, or CDS, is a financial contract that lets an investor protect against a borrower’s possible default. It works similarly to paying a premium for insurance. The contract focuses on a borrower’s debt, such as bonds issued by a cloud provider or another AI infrastructure company.

The investor buying protection pays a regular cost. If the borrower defaults or fails to meet the contract’s defined obligations, the swap compensates the buyer. In the article’s example, an investor could buy protection on $1 million of CoreWeave bonds. The annual price of that protection shows how worried the market is.

CDS prices therefore provide a visible measure of perceived credit risk. CoreWeave protection rose to $100,000 a year, while Oracle protection reached $28,000. These contracts can also be used to bet on a possible default, although Blue Owl’s CEO said the company does not do that.

The cost of insuring CoreWeave debt rose dramatically. Protection on $1 million of its bonds cost under $40,000 a year for five years one year ago. It now costs $100,000 annually. The article does not give CoreWeave’s total debt, but it says the company’s debt load tripled over the past year.

Oracle’s increase was smaller in percentage terms but still sharp. Its default protection rose 12% in one week. A $1 million policy now costs $28,000. Oracle has $160 billion of debt, and that debt is described as sitting just above junk-rated status.

These prices show investors demanding more to bear default risk. CoreWeave’s bond prices fell sharply and its debt yields topped 15%. Oracle’s risk is partly linked to setbacks at a New Mexico data-center project, including regulatory snags and local opposition.

AI infrastructure companies need large physical facilities and computing capacity to support the boom in artificial intelligence. Building that infrastructure requires major upfront spending. The article says companies have issued record amounts of debt over the past year to fund this rapid expansion.

Borrowing lets these companies build data centers and computing capacity before all the money from AI-related business has materialized. That timing creates a central risk. Investors are increasingly anxious about how much capital the buildout will require and how quickly revenue will arrive to support it.

The borrowing surge is now meeting tougher market conditions. Interest rates are rising, and investors are becoming more selective about who receives loans. As a result, debt issuance has slowed. A Volta Infrastructure deal faltered when investors demanded higher yields, showing how expensive and difficult new financing can become.

Growing default fears make investors less willing to hold a company’s bonds at existing prices. To attract buyers, those bonds must usually sell for less. Because the bond’s promised payments are then measured against a lower purchase price, its yield rises. That yield reflects the return investors demand for taking greater risk.

CoreWeave provides the article’s clearest example. Its bond prices fell sharply during the week, and yields on its debt climbed above 15%. At the same time, the cost of buying default protection rose from under $40,000 to $100,000 per year for each $1 million of bonds.

Higher yields also raise the company’s cost when it seeks fresh financing. Volta Infrastructure’s debt deal faltered after investors demanded higher yields. If this pattern spreads, AI infrastructure companies may find it harder and more expensive to fund additional data centers and computing capacity.

A data-center project can create financial pressure when construction or approval problems delay its launch. The company may still face project-related bills even though the facility is not operating as planned. Those obligations can make it harder to manage debt and other payments on schedule.

Oracle’s New Mexico project has faced regulatory snags and opposition on the ground. Oracle told one lender, including Blue Owl, that it would defer lease payments and other financial obligations tied to the deal if the data center does not come online as planned in 2028. However, it still has to pay some interim costs and rent for the space.

This structure makes the project important to investors assessing Oracle’s credit risk. Delays do not erase every obligation. They can leave costs continuing while the project remains unfinished, helping explain why protection against an Oracle default rose 12% in one week.

Interest is the cost of borrowing money. It compensates lenders for providing funds and for waiting to be repaid. It also reflects the possibility that the borrower may not fully meet its obligations. A loan to a financially strong borrower usually carries less perceived risk than a loan to a heavily indebted company.

When default risk rises, lenders demand a higher interest rate. The extra return is meant to compensate them for accepting greater uncertainty. In bond markets, this often appears as a lower bond price and a higher yield. The article shows this dynamic in CoreWeave’s debt, whose yields topped 15% after bond prices fell sharply.

The same pressure affects new borrowing. Investors demanded higher yields from a Volta Infrastructure debt deal, and the deal faltered. Rising rates and selective lending therefore make it more expensive for AI infrastructure companies to raise the capital needed for further construction.