$90 Billion In Bonds Adds To AI Market Pressure

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Quick Read

• The bond market is showing signs of stress, particularly for neocloud companies like CoreWeave and Applied Digital, which face doubts about bond viability and difficulty raising debt as the industry shifts toward debt-funded investment cycles.

• Hyperscalers are securing highly favorable deal terms with smaller firms such as IREN, which is creating risk.

• The current environment resembles parts of 2021’s speculative chase for growth, making it important for investors to monitor credit-related risks like credit default swaps.

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https://youtu.be/PnkuFm7fU5U

Summary:

During a recent episode of The AI Investor Podcast, 24/7 Wall St. Analysts Eric Bleeker and Austin Smith discussed the emerging stress in the bond market, particularly as investment cycles shift from being cash-flow funded to debt-funded.

Austin specifically raised concerns about companies like CoreWeave, noting growing skepticism around the viability of their bonds and the possibility of default. He also noted that Applied Digital is struggling to sell debt which suggests a broader tightening in financing conditions for speculative tech infrastructure firms.

Eric acknowledges that he avoided adding neocloud companies to his portfolio because hyperscalers already offered strong, lower-risk growth opportunities. He points out that hyperscalers often strike deals with smaller providers on extremely favorable terms, leaving those smaller firms exposed when their debt costs rise. One such example came earlier this month when Microsoft signed a favorable $9.7 billion deal with IREN.

As Eric explains, "The problem is if IREN has swelling costs of debt, it's going to be really hard for them to kind of make this math work."

Eric warns that the current environment resembles the speculative excesses of 2021, driven by a chase for revenue growth regardless of underlying quality. As a result, investors must monitor obscure but important risk indicators (such as credit default swaps) to understand the seriousness of current credit market skepticism.

Transcript:

Austin: Let’s look at what's happening with the bond market crash. I do wanna move us crisp crisply through here, but there are some losers going on on the bond side of things, which typically we don't talk about. We're very much on the equity side, but as we transition from cash flow funded to debt funded investment cycles here, bonds and debt markets, will matter more.

So what is going on with CoreWeave, right? Like the. Uh, the, the neo cloud that we discussed, I think our episode was called Into the Clouds. We discussed a little bit about CoreWeave and, and other neo clouds. So if you want some context here, go back and listen to that episode. But there are some real, real--clouds, shall we say-- around the believability of their bond viability. And there there's a belief that they will default. We're also seeing that Applied Digital is having a hard time selling debt. Talk to me about this new development, like the, this new factor entering this arena as debt becomes an element here.

Eric Bleeker: Yeah, and we'll try and do some quick hits, but I had originally not added the neo clouds to the portfolio because. I thought the hyperscalers were gonna see outstanding growth this year, that seems to be true. So it gives you a lower risk profile. They are going to rely on debt. You know, Austin, the one warning I would have for investors, you, you mentioned IREN, or earlier they announced these big deals with hyperscalers and people say. these are great investments because there's gonna be so much demand, it's, it's gonna spill over. Well, the reason the hyperscalers are often doing these deals is 'cause they're getting such great terms. Like the terms Microsoft got for its deal with IREN were fantastic for Microsoft. And the problem is if IREN has swelling, cost of debt, it's gonna be really hard for them to kind of make this math work. So I think sometimes you do see the comparisons to 2021. And this kind of chase for revenue growth. Indiscriminate quality is an example of that. And that's why we've stayed away from the most speculative ideas in this market. We've talked about a stock like Applied Digital. If, if investors wanted a higher risk profile, but we haven't added to the portfolio, it's a really dangerous cycle right now.

And you, you do, if you are in this market, for better or worse, you need to be watching esoteric ideas like correct default swaps because right now are not buying what they're selling.

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