A growing number of investors are buying credit-default swaps (CDS) to hedge against possible defaults by hyperscale cloud providers that have taken on large amounts of debt to scale artificial intelligence. That demand for protection has driven up the price of CDS tied to those companies.
Which companies are most affected?
The cost of protection has risen most for providers with the heaviest debt loads:
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CoreWeave: its debt has tripled over the past year. The price to insure $1 million of CoreWeave bonds for five years has increased from under $40,000 a year ago to about $100,000 today. This week CoreWeave bond prices fell sharply and yields on the debt topped 15%. CoreWeave’s CEO sent an internal memo saying the market was acting “irrationally.”
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Oracle: the company carries roughly $160 billion of debt, a level hovering just above junk-rated territory. The cost to hedge against an Oracle default rose 12% in a week; a $1 million policy now costs about $28,000. Investor concern is partly linked to a New Mexico data-center project that has faced setbacks.
Last month Oracle told one of the lenders on that project, including Blue Owl, that it would defer lease payments and other financial obligations tied to the deal if the data center does not come online as planned in 2028. The project has encountered regulatory delays and local opposition. Oracle still faces interim costs and must pay rent for the space.
Derivatives market and new debt deals
Blue Owl CEO Doug Ostro noted on the podcast Compound Interest that the derivatives market allows participants to place bets that a company, such as Microsoft, could default on lease payments — though he said Blue Owl does not take such positions. The remark highlights how derivatives provide a mechanism for investors to express credit concerns.
At the same time, new debt placements are becoming more difficult. This week a financing deal for Volta Infrastructure faltered after investors, feeling saturated with data-center debt, demanded higher yields.
What the CDS moves mean
Credit-default swaps are financial instruments that let investors buy insurance against an issuer’s potential default: the buyer pays a premium and the swap compensates the buyer if a default occurs. Record amounts of debt were issued over the past year as companies rushed to build the infrastructure and compute capacity needed for AI. Issuance has slowed in recent months amid rising interest rates and greater investor selectivity.
Rising CDS prices reflect growing market concern about the ability of hyperscalers — especially those that dramatically increased leverage — to generate revenues quickly enough to service their debt. More expensive credit protection increases financing costs and can make it harder for heavily indebted companies to raise additional capital.
(The article is based on the reported information about price moves, debt levels and financing developments occurring in the referenced week.)
