CoreWeave: Debt Under Pressure and Impact on Neoclouds

Key Takeaways

1CoreWeave's debt is treated as distressed, with a 1,000 basis point premium

2The company has over $35 billion in debt and lost more than $1 billion in the first half of the year

3Concerns extend to neoclouds and Oracle, whose stock has fallen by about 10%

4CoreWeave has $103.7 billion in customer performance bonds, with 40% due in 2028 on contracts that are difficult to terminate

Why it matters : CoreWeave's financial situation and investor nervousness are impacting the entire AI infrastructure sector.

CoreWeave's bonds are now considered distressed debt, with a premium of 1,000 basis points over Treasuries. The company has accumulated over $35 billion in debt and lost more than $1 billion in the first half of the year. Meanwhile, its clients owe it $103.7 billion in performance bonds, with 40% due in 2028, under contracts with very limited cancellation options. Concerns are spilling over to other players, including Oracle.

Sell-off on Oracle and widespread nervousness about neoclouds

Following concerns surrounding CoreWeave, Oracle's stock has dropped by about 10% during the same period. A sell-off of Oracle bonds has also occurred. Investor concerns are not limited to CoreWeave and extend to the entire neocloud sector. It remains uncertain whether the bare-metal sector is viable. Despite recent volatility, some investors are taking advantage of falling prices to buy.

Financial structure: high debt and losses in the first half

In the second quarter, CoreWeave reported debt exceeding $35 billion. The company was among the first to use GPUs as collateral to secure loans. Its core business is the sale of computing capacity, a sector in which it has not generated profits and recorded over $1 billion in losses in the first half.

Financing: seeking investment-grade quality and fears of increased burden

Brannin McBee, co-founder of CoreWeave, aims for the company's debt to achieve an investment-grade rating in order to solicit loans from insurers, whose capital he considers unlimited. Earlier this year, CoreWeave secured initial chip financing with an investment-grade rating. However, some investors fear that this access to financial resources may push CoreWeave, already heavily indebted, to further increase its debt. John Yovanovic from MetLife Investment Management notes that the issue stems from a year and a half of additional supply to absorb, rather than a change in credit profiles. Currently, CoreWeave's bonds are trading with a premium of about 1,000 basis points above Treasuries, which corresponds to the distressed category.

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Revenue visibility: $103.7 billion in commitments and rigid contracts

At the end of the second quarter, the total amount of performance bonds remaining to be honored by CoreWeave's clients stood at $103.7 billion. Nearly 40% of this amount is due in 2028, and these contracts can only be terminated under very exceptional circumstances. Microsoft and OpenAI are among CoreWeave's largest clients. The identity of the third-largest client is not disclosed, but it is likely Nvidia. These three clients generated nearly three-quarters of CoreWeave's second-quarter revenue.

Market trigger: public alert and correction of over 20%

Chamath Palihapitiya highlighted CoreWeave's debt situation and mentioned the possibility of a private credit bubble in the AI sector. Since Tuesday's close, CoreWeave's stock has fallen by more than 20%. During the same period, other AI companies appear to have suffered collateral damage.