Investors sell data center bonds as AI debt looks riskier

In short: Investors are pulling back from bonds used to finance AI data centers and “neocloud” companies, as doubts grow about whether AI income will be enough to repay the debt.

What's going on

Bonds are a way for companies to borrow money, like taking out a large loan that gets split into many small pieces investors can buy. In recent weeks, prices for several bonds tied to major US data center projects have dropped well below their original value.

The Financial Times reported declines in bonds linked to projects where big tech companies plan to rent space, including sites connected to Meta, Microsoft, Nvidia, and Oracle. For example, bonds backing the “Hyperion” project slipped to a little under 92 cents on the dollar. Bonds linked to Blackstone-owned QTS’s “Project Excalibur” in Georgia fell below 88 cents.

Debt tied to “neocloud” companies has been hit harder. Neoclouds are newer cloud computing providers that focus heavily on renting out AI computing power, often using Nvidia chips. CoreWeave, one of the best known, saw its bonds fall below 80 cents on the dollar, a level often seen as distressed, and the yield moved close to 15 percent.

Some of the pressure comes from worries that AI spending will not grow fast enough. The report also points to delays in power and construction, and to local opposition to data centers over issues like water use, noise, and pollution.

What to watch

If bond prices keep falling, building new data centers could become more expensive, because lenders may demand higher interest rates. Watch for more project delays, tighter local rules, and whether AI companies can show stronger sales that match the pace of infrastructure spending.

Source: Financial Times