J.P. Morgan Private Bank says the market now puts the five-year default odds of one AI infrastructure company carrying heavy debt near or above 50%. Twelve months earlier, the same measure was below 30%.
The numbers are from an Oct. 23 report by Justin Biemann, global investment strategist at J.P. Morgan Private Bank. His point is simple. Lenders used to welcome a company that called itself an AI business, and that is no longer enough to get a loan.
“The AI label alone is no longer enough to reassure lenders. Companies must show that they can finance investment, service their debt and eventually turn spending into cash flow,” Biemann said.
Musk sees the same squeeze
Biemann has company. On Sunday, Elon Musk said debt funding is drying up for AI neoclouds, the companies that earn nearly all their revenue from data centers.
A bank strategist and Musk are very different sources, and they reached the same view within days. Their warnings also arrive as the market starts to question whether AI spending will ever turn into profit on a balance sheet.
The tech-heavy Nasdaq is down 6.7% since Oct. 6, falling from 31,360 to 29,263. AI-linked stocks such as Nvidia and Oracle have dropped further than the index.
Default protection costs more
Credit markets show the strain most plainly. Insuring against default on the debt of several AI-linked companies now costs more than it ever has.
The insurance in question is a credit default swap, or CDS. A buyer pays an annual premium and gets a large payout if the borrower goes bankrupt or misses payments. The premium is called the spread and is quoted in basis points. A 100-basis-point spread means covering $10 million of debt costs $100,000 a year. When the spread widens, investors are asking for more money to hold the credit risk.
Buyers want a lot more of that cover. According to Morgan Stanley, weekly trading in CDS linked to bonds from Oracle (ORCL), SpaceX (SPCX), Alphabet (GOOG), Amazon (AMZN), Meta (META), Broadcom (AVGO) and Nvidia (NVDA) averaged more than $9 billion in September, up from under $2 billion a week in July.
One unnamed borrower stands out
Firms that lean hardest on debt look weakest. Biemann did not identify the company, but he said one AI infrastructure firm that depends on financing has piled up tens of billions of dollars in debt and other obligations.
That company’s five-year CDS spread reached 1,100 basis points, so covering $10 million of its debt would cost more than $1 million each year.
“Pricing at these levels implies near or above a 50% probability of default over five years, up from below 30% a year ago,” Biemann said.
A Lehman parallel, with limits
Biemann used Lehman Brothers as an example of CDS giving early warning. In the third quarter of 2007, Lehman’s spread averaged under 100 basis points. It climbed past 1,400 by mid-September 2008, when the bank filed for bankruptcy and rattled global markets.
He stopped short of calling for a repeat. Biemann said investors can read current CDS levels “as warning lights rather than countdown clocks.”
For the largest AI companies, the activity looks closer to hedging than to bracing for a crisis. Biemann said big AI leaders with strong cash flow pay 50 to 120 basis points for five-year protection, levels that “still look more like the price of portfolio insurance than a prediction of financial distress.”
Some established infrastructure borrowers have drifted toward 300 basis points. Protection across the broad investment grade market is relatively contained.
“The concern is confined to business models that require debt markets to remain open while spending stays high and cash flow remains limited,” Biemann said.
What it means for bitcoin
AI has been one of the biggest stories drawing investors into risk assets, and bitcoin has benefited. Both bitcoin and Nvidia hit their lows within weeks of ChatGPT’s launch in late 2022, and both have climbed a long way since.
If lenders keep backing away from cash-burning AI borrowers, the fallout could spread beyond data centers. Crypto investors who track Nvidia’s chart may want to keep an eye on that 1,100-basis-point spread as well.