AI Infrastructure's Funding Woes Exposed: Bonds Issue 'Warning,' Some IBs 'Buy' Coreweave

2031 Treasury yield exceeds 16% intraday... CDS exceeds 1,000 basis points, highest ever, JP Morgan overweights, Deutsche purchases maintained... Expected facility investment, 4.5 times operating cash flow

While the stock and bond prices of AI cloud company Coreweave fell simultaneously, some investment banks (IBs) on Wall Street maintained positive stock investment opinions. Although the burden of financing large-scale investments was highlighted in the bond market, JP Morgan and Deutsche Bank evaluated the growth potential of the business based on demand and long-term customer contracts.

According to Reuters, the yield on Coreweave's dollar bonds maturing in October 2031 exceeded 16% during intraday trading on the 15th (local time). The 5-year maturity credit default swap (CDS) premium, which protects against default risk, also reached an all-time high, exceeding 1,000 basis points. 16% is the distribution yield of existing bonds and is not the interest rate applied to all of the company's borrowings. However, if the rate of return required by bond investors increases, new borrowing and refinancing may become a burden in the future.

The anxiety was not limited to Coreweave. According to a Goldman Sachs analysis reported by Yahoo Finance on the 16th, the added interest rate on AI-related dollar-denominated high-yield bonds increased by 25bp between the 13th and 14th, reaching a record high of 360bp compared to U.S. Treasury bonds. During the same period, the expansion of high yield bonds unrelated to AI was only 2bp. Amanda Lynum, a credit strategist at Goldman Sachs, analyzed that high interest rates and the burden of energy costs are factors causing reevaluation of the investment profitability of AI companies with low credit ratings.

In the stock analysis, the evaluation gave weight to secured demand and contracts. According to reports from The Fly and Benzinga on the 16th, JP Morgan analyst Samik Chatterjee maintained an overweight opinion on Coreweave. He said data center demand has improved in recent months, noting that Coreweave sells computing capacity under long-term contracts before the facility comes online. Considering this business foundation, we believe that recent market concerns are excessive.

The profitability of the contract was also emphasized in the Deutsche Bank analysis reported by Investing.com on the 15th. Analyst Brad Zelnick maintained a buy opinion and target price of $150, explaining that most of the order backlog is based on long-term take-or-pay contracts. It is a structure in which customers pay the contracted amount regardless of actual usage, and it is evaluated that contract sales can cover related facility investment and operating costs and make a profit.

The problem is that having a solid contract and having sufficient funds for expansion are two different things. Deutsche Bank estimated Coreweave's operating cash flow for the next 12 months to be approximately $10 billion and the facility investment required over the same period to be approximately $45 billion. The expected facility investment is 4.5 times the operating cash flow, meaning that it is difficult to cover investment demand with cash generated from the business alone. Zelnick believes that although additional capital is needed, it can be steadily raised based on customer order backlog.

Financing costs also vary depending on the borrowing structure. According to Deutsche Bank, Coreweave has been financing each project based on customer contracts, and the cost was the same or lower than the parent company's borrowing rate.

Differences by procurement structure were also observed in the data center securitization market. Vichy Thirupattur, chief bond strategist at Morgan Stanley, previously explained in his podcast on August 21 that the increase in additional interest rates for data center asset-backed securities (ABS) and commercial real estate mortgage-backed securities (CMBS) was smaller than that for unsecured corporate bonds. The analysis is that cash according to the contract is coming in from assets for which construction, power connection, and leasing have already been completed, and the pace of increase in issuance has been relatively slow.

Summarizing these analyses, the key question is whether Coreweave can secure the necessary investment in time while maintaining procurement costs at a level that the business can afford. How much and under what conditions is actually raised based on customer contracts becomes a standard for judging the concerns of the bond market and the optimism of some IBs.