Are data centers worth the debt? NYT flags AI borrowing as a weak link

Questions raised over whether CoreWeave, Oracle debt signals structural problem

The CoreWeave logo. [Reuters]

Questions are mounting over whether AI data center projects can generate enough returns to justify their costs, as the massive borrowing required to build them rattles broader markets.

The New York Times on Sunday (local time) highlighted the financing and debt burdens of CoreWeave, Oracle and SoftBank, asking whether these represent isolated corporate vulnerabilities or early signs of a structural problem spreading across the data center industry.

CoreWeave has been at the center of recent concerns. With 51 data centers in operation and debt reaching $72 billion, markets have put the probability of a default at more than 60 percent.

Last week, the yield on CoreWeave's corporate bonds surpassed 15 percent — a level associated with junk bonds. Its share price fell 24 percent overall, including a 12 percent tumble on Friday alone.

As doubts grow over CoreWeave's business model, some have drawn comparisons to WeWork, the office-space provider that ran into crisis under a similar structure.

CoreWeave's model works as follows: it buys AI chips made by Nvidia and others, signs lease agreements of 15 years or more with data center owners to install those chips and enable AI computing, then subleases the space to customers such as Meta, Microsoft and OpenAI.

The problem is that CoreWeave bears all the costs involved in this chain. It must pay for chip purchases and data center construction and operation before it can lease out the space — and it remains liable under its original lease agreements with data center owners even after its own customers' contracts expire.

Some investors worry whether hyperscalers — large-scale data center operators such as Meta and Microsoft — will continue to need to rent space from CoreWeave going forward.

The concern is that by the time those lease agreements expire, the data centers in question may be outdated or altogether obsolete.

CoreWeave spokesperson Leah Davis pushed back on those concerns, saying in a statement: "The complexity of our financing structure reflects sound management, and that is something we are proud of."

CoreWeave CEO Michael Intrator also addressed the issue in a memo to employees on Wednesday, saying the company has "conviction in our business model, our customers, our exceptional execution and the financial systems we have built," and called recent market moves "irrational."

Markets have also seen selling pressure on corporate bonds issued by Oracle and other companies, though the price declines have been less severe than those for CoreWeave. Large firms such as Meta and Alphabet continue to borrow heavily, but the interest rate premiums they pay remain relatively low.

According to investment bank Barclays, yield spreads on riskier AI-related corporate bonds have surged more than 50 percent over the past six months.

Alexandra Coleman, founder of data center risk research firm Azrak, said the entire market is "walking on thin ice."

Economists, banks and private equity fund managers are now revising upward — week by week — their estimates of how much debt will be needed to build out AI systems.

David Munves, head of credit strategy at research firm AIR Platform, said markets "are starting to realize there is a potential mismatch between the capital that needs to be deployed and borrowed today and the ability to generate revenue in the future."

Permitting delays are also emerging as a problem, with some data center construction projects stalled or scrapped as a result.

Oracle's 902 MW data center project in Wisconsin, which the company had targeted to bring online by 2028, has hit a snag after the approval timeline for grid construction was pushed back. Data center research firm Aterio said the facility is increasingly unlikely to begin operations before 2029.

A project in New Mexico faces similar permitting hurdles. Developer Blue Owl has begun construction but is struggling to obtain power supply approvals. Sources said some of the $18 billion in debt tied to the project recently traded at 80 cents on the dollar.

yckim6452@heraldcorp.com