Investors dump data centre bonds as AI borrowers face ‘Darwin moment’

Investors are losing confidence that revenues from the AI boom will be sufficient to support the vast debt piles financing data centres, pushing bonds backing some of the largest US infrastructure projects into increasingly stressed territory.

Prices of bonds issued to fund prominent data centres where Meta, Nvidia, Oracle and others will become tenants — such as “Hyperion”, “Sopaipilla” and “Project Excalibur” — have fallen well below par in recent weeks.

Investors are also dumping debt issued by so-called neocloud companies — of which the best known is Nvidia-backed CoreWeave — who have been the most aggressive in how they finance the AI build-out.

OpenAI’s decision to delay its initial public offering until next year and a slowdown in Anthropic’s quarterly sales growth have triggered doubts about the sustainability of the AI boom, as analysts point to a multitrillion-dollar gap between infrastructure spending and the revenues needed to finance it.

“Data centre bonds are having their Darwin moment, where the weakest credits struggle to survive,” said Ludovic Subran, chief investment officer at Germany’s Allianz. “The surge in credit spreads following power and construction delays show that data centre debt is priced too tight for execution risk.”

The price of debt issued by Blue Owl and Meta-backed special purpose vehicle Beignet Investor to fund the Hyperion project has slipped from above par in early July to a little under 91 cents on the dollar.

Separately, bonds backing two Hut 8-developed projects — one in Louisiana and another in Texas leased by Nvidia — have fallen to around 93 and 91 cents on the dollar respectively. Bonds for the Blackstone-owned QTS data centre in Georgia dubbed “Project Excalibur” and leased to Microsoft have slipped below 87 cents on the dollar.

Neocloud providers have been hit even harder. Bonds issued by CoreWeave have sunk below 75 cents on the dollar — prices typically considered distressed — pushing yields to nearly 16 per cent on Wednesday. The company’s shares are down nearly 25 per cent over the past week, while rival Nebius has lost more than 20 per cent.

AI chip giant Nvidia, which has invested tens of billions of dollars in numerous neoclouds and AI start-ups, has itself shed more than $300bn in market value over the past week.

The rout has come as a report this week by tech consultancy Gartner predicted that 80 per cent of neoclouds would “cease independent operations” by 2030, because of a multitrillion-dollar gulf between the pace of capital spending and expected returns from AI.

Gartner said AI data centre owners would need to generate revenues of $8.5tn by the end of 2030 to cover their capital and financing costs and generate healthy returns on those investments. But it forecast that consumer and corporate spending on AI services that would flow to data centre providers would reach “no more than $3.6tn”.

“A continued AI infrastructure investment trajectory could leave more than $4tn in asset value exposed to writedown risk through 2032,” Gartner said.

The FT reported last week that OpenAI’s annualised revenue — one of the most important indicators of overall AI demand — was $20bn less than the company had signalled. That sparked a deep equity market sell-off that has renewed this week.

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Meanwhile, a political backlash to data centres has swept the US, driven by concerns over water, noise and air pollution, stalling some projects. States including New York and Texas have imposed strict restrictions on new proposals while others are considering similar curbs.

Data centre opposition is “something we’re watching closely”, said Tom Murphy, head of US investment grade credit at Columbia Threadneedle. “I wouldn’t say it’s changing our investment decision-making, but it does make data centres that are already up and running more valuable.”

Last month, the FT reported that about $18bn of loans tied to Oracle’s “Project Jupiter” data centre in New Mexico had slid into stressed territory after the site hit permitting delays with its power supply because of local opposition. Debt issued to fund the construction of Oracle’s AI campus in Michigan has also sold off to 88 cents on the dollar, down from par in July.

Investors have also been worried about circular financing, where customers and suppliers finance each other. A recent report from the Bank for International Settlements found that “a significant portion of financing and commercial relationships in AI are self-referencing”.

Additional reporting by Tim Bradshaw