An unprecedented global surge in AI computing infrastructure construction is transforming "future AI compute revenue prospects" into a powerful present-day financing capacity to purchase AI chips, inextricably linking chipmakers, cloud computing providers, and Wall Street creditors. Blackstone Group LP (NYSE: BX) almost single-handedly drove the expansion of a financing model that uses AI chips as collateral and customer computing contracts' cash flows to service debt. This "AI Chip-backed Debt" encompasses private loans, bank financing, and leveraged loans, with bonds being just one possible form. In 2023, private equity giant Blackstone Group LP (NYSE: BX) led a $2.3 billion loan to AI neocloud leader CoreWeave, becoming an early template for chip-collateralized financing; today, this market is growing toward the trillion-dollar scale. Large customers' procurement contracts provide repayment cash flows, while AI chips and the underlying computing clusters serve as collateral assets — meaning borrowers pledge the GPUs and other computing equipment they purchase and hold as loan collateral, with AI chip suppliers such as Nvidia, Broadcom, and AMD providing further credit support. But as energy inflation, surging U.S. Treasury yields drive up funding costs, and new bond supply increases globally, the market is beginning to reassess: whether these future revenues can be delivered on time, and if they fall short, who ultimately bears the losses. Under normal circumstances, computing service fees or equipment rental payments from customers are used to repay principal and interest; if the borrower defaults, lenders can dispose of the collateralized equipment through contractual and legal procedures, recovering funds by selling or re-leasing, with the recovery amount depending on the equipment's value at that time. The sustainability of this AI-era financing mechanism — where customer contract revenues provide debt-service cash flows, GPUs and other equipment provide collateral protection, and some transactions receive additional credit support from suppliers like Nvidia and Broadcom — is increasingly being questioned by the market as AI financing costs climb, with growing concerns that AI infrastructure projects, after covering investment and operating costs, may fail to earn a positive return exceeding financing costs. This mechanism appears to have encountered significant doubts in financial markets recently. CoreWeave (CRWV.US), the stock at the very center of the "AI compute selloff storm" and "AI bubble burst narrative," has recently been under dual pressure from company-level credit risk and continuous financing needs. Media reports on October 22 showed that its 2031-maturity bond yields approximately 15.76%, and its five-year Credit Default Swap (CDS) is at about 1,115 basis points, implying a roughly 63% five-year cumulative implied default probability, compared to about 30% a year ago. This probability includes recovery rate assumptions and risk premiums and should not be directly interpreted as an actual default forecast. Japanese investment giant SoftBank, which has gone nearly ALL-IN on the AI wave in recent years, faces similarly concrete AI financing pressures — its three-tranche dollar bond issuance in September carried coupons of 8.625%, 9.25%, and 9.75% respectively; its five-year CDS rose to 432 basis points on October 20, the highest in nearly four years; the former shows new funding has become expensive, while the latter reflects the market demanding higher credit compensation. Even those highly-rated tech giants have been severely impacted by rising AI financing costs. On October 22, ICE data showed Meta's five-year CDS rose intraday to about 119.3 basis points, widening by as much as 8.9 basis points, with its bonds simultaneously weakening relative to U.S. Treasuries; Microsoft's CDS also rose, and Amazon-related indicators approached their highest levels since March 2020. In the cash bond market, explicit quotes from October 5 showed that yields to maturity on Microsoft's 2060-maturity bonds, Amazon's 2076-maturity bonds, and Meta's 2064-maturity bonds were approximately 6.36%, 6.95%, and 7.48% respectively. It should be noted that these are secondary market quotes for long-duration bonds of different maturities, reflecting the combined impact of sharply rising 10-year U.S. Treasury yields and credit premiums, and do not represent the actual coupon rates on the companies' entire debt. For highly-rated tech giants like Amazon, Microsoft, and Google, the financing pressures associated with AI infrastructure manifest primarily as new bond issuances requiring higher yields, long-term commitments squeezing future cash flows, and credit support potentially converting into actual expenditures. During the AI selloff in July, Goldman Sachs analysts had already found that a $25 billion Amazon issuance pushed the spread on one of its existing 30-year bonds wider by about 20 basis points. Meanwhile, U.S. Treasury yields have not always moved in one direction: on October 23, Brent crude rose to about $114, but safe-haven buying pushed Treasury yields back below 5%. Declining yields on 10-year and longer-dated Treasuries and widening tech corporate credit spreads can occur simultaneously, so whether the AI financing environment can improve requires both to show positive effects together. Blackstone Group LP (NYSE: BX) opened the door to AI chip financing, and Wall Street is betting that computing power becomes an asset. "What is a GPU?" Blackstone Group LP (NYSE: BX) executives asked CoreWeave's management at the time. They also asked: "Is AI actually real?" These questions were entirely reasonable when the AI boom was just emerging and CoreWeave was still a little-known AI cloud company looking for chip-purchasing funds. Blackstone Group LP (NYSE: BX)'s Tactical Opportunities team was convinced by the answers they received and in 2023 led a $2.3 billion private credit loan. This was the first major deal of its kind and became the template for chip-backed debt financing. Three years later, this market is heading toward the trillion-dollar scale, potentially even exceeding the borrowing used to build the data centers that house these chips. This illustrates just how tightly global AI expansion and credit markets have become intertwined in such a short time. Just this week, Blackstone Group LP (NYSE: BX) President Jon Gray described AI demand as growing almost "parabolically." But CoreWeave also embodies market anxiety about the massive amounts of capital flooding into this space — in recent weeks, its stock and corporate bonds have been battered, with investors questioning whether AI revenues can justify such staggering investments. The expected growth of this market has attracted participation from virtually all major U.S. banks and alternative asset managers, and has also secured backstop support from AI chipmakers Broadcom and Nvidia, whose combined market capitalization is approximately $7 trillion. Broadcom is working with Wall Street institutions to arrange a $60 billion debt financing deal for a special entity that will purchase chips called Tensor Processing Units (TPUs) and lease them to Anthropic. Meanwhile, SpaceX is in negotiations to raise $40 billion to purchase Nvidia chips. Previously, Nvidia announced a $500 billion partnership with six major lenders to help customers purchase its Graphics Processing Units (GPUs). Such massive spending scale could make debt markets dependent on AI's profitability. Amid rising interest rates, as tech companies compete for limited capital, this financing flood could also push up borrowing costs for AI and other industries. JPMorgan analysts estimate that chip spending through 2030 could exceed $3 trillion, most of which may be raised through borrowing. Fitch Ratings senior director Jason Pompeii said: "Supplier financing is unfolding on an unprecedented scale and in a way that concentrates risk. This only increases the possibility that if AI ultimately disappoints, the effects will ripple through the entire supply chain." This strategy is built on a belief: that compute demand will continue to exceed supply for years to come. Morgan Stanley's global head of structured products and private capital markets, Rich Myers, said: "These financings rely on the most valuable thing in the market — the computing power that chips provide. There is substantial evidence that compute demand will continue to grow and is outpacing compute supply." However, risks remain as to whether infrastructure construction can maintain this momentum. Local opposition prompted Texas to pause new data center projects; meanwhile, Oracle has taken steps to delay payments on a New Mexico project mired in regulatory hurdles. Following a series of events, OpenAI and Anthropic are also discussing slowing their rollout pace due to safety and existential risk concerns. Nevertheless, massive spending is already locked into hyperscale data centers under construction, which will generate chip demand when they come online. Since supplier capacity is largely sold out and a severe memory shortage has driven up costs, companies producing servers equipped with Nvidia AI chips notified customers in August that prices for many products would rise by more than 15%. Blackstone Group LP (NYSE: BX) Tactical Opportunities senior managing director John Watson said: "This is a new sector in the economy that needs an orderly financing mechanism." In Watson's view, this is similar to the uncertain early stages of the automotive industry and Ford's launch of the Model T for the mass market. He said in a recent interview: "If you were financing Ford's Model T back then, you would also ask: 'What am I actually doing? Will people really drive cars?' Today, the auto finance market is mature, stable, widely understood, and enormous. Cars became the most-purchased machines in America. We have a similar vision for compute." How do chips, contracts, and credit support combine to unlock massive financing? The reality driving these capital needs is that chips cost two to four times as much as the data centers that house them, but depreciate over approximately five to six years. For example, in AI cloud provider Nscale's flagship project in West Virginia, the accompanying power plant is expected to cost $6.5 billion, with the data center and equipment requiring another $18 billion. GPUs account for $47 billion. Investment-grade-rated cloud computing giants — Alphabet's Google, Microsoft, Amazon, and Meta — primarily fund these hardware expenditures through cash or lower-cost bond issuance recorded on their corporate balance sheets. But OpenAI and Anthropic, which are burning billions of dollars, neither have such financial reserves nor equivalent debt market financing strength. The same applies to neocloud providers that specialize in providing cloud computing services for AI. OpenAI's head of business finance, Mike Liberatore, said: "The scale of infrastructure construction is unprecedented. There is no existing template for how to go from zero to AGI in such a capital-intensive business and raise funds through traditional means." Here, AGI refers to Artificial General Intelligence. As a result, the industry has borrowed and adapted project finance and structured finance mechanisms. By establishing Special Purpose Vehicles (SPVs) to isolate each transaction's assets, liabilities, and risks, financiers can raise debt based on the transaction's own terms and the customer's credit quality, often without recording it on the relevant company's balance sheet. It is the SPV that borrows to purchase and hold the chips. The debt is supported by cash flows generated by the target customer and by the value of the chips themselves; these cash flows are used to pay interest and, over time, gradually repay the entire debt. By matching debt tenor to the chips' expected five-to-six-year depreciation schedule, lenders protect against hardware depreciation risk. Two main models have emerged: one where customers lease chips from the SPV and integrate them into their own technology stack; another where neocloud providers sell computing power to customers and use debt financing to purchase chips to build the infrastructure needed for this service. Broadcom and Nvidia have gone a step further, providing backstop arrangements for multi-billion-dollar deals, committing to support lenders if problems arise. This aligns the credit rating of the related debt with the chipmakers' investment-grade credit profiles, thereby reducing the SPV's borrowing costs. A Broadcom representative declined to comment, and an Nvidia representative also did not comment. Executives from both companies have previously said they believe the risks associated with these financing structures are limited. To access the largest pools of capital, especially insurance funds, an investment-grade rating is crucial. Chris Edson, global head of business development at Apollo Global Management, said that digital infrastructure financing has outgrown what traditional public debt markets can provide, requiring participation from project finance, private placement, insurance, and commercial real estate markets. He said: "We have been focused on high credit quality investment opportunities, reducing risk through collateral security, amortizing principal, minimal or no residual value risk and renewal risk, diversification, and high credit rating offtakers." CoreWeave, which has a junk rating and has never hidden its desire to be upgraded to investment grade, was founded in 2017, initially engaged in cryptocurrency mining, then rapidly pivoted to selling AI computing power leveraging its GPU expertise. As Microsoft sought more GPU resources to support partner OpenAI, the tech giant became CoreWeave's largest customer. To pay for chip purchases, CoreWeave's founders drew on their past experience in commodities. They adapted a model common in markets such as Liquefied Natural Gas (LNG): customers sign contracts first, then developers use those agreements to obtain debt financing for building facilities. The first debt financing in 2023 was backed by a Microsoft contract, and CoreWeave bore a high borrowing rate in the mid-teens percentage range. CoreWeave co-founder Brannin McBee recalled: "This was the most challenging due diligence I have experienced in my life." He also recounted the questions Blackstone Group LP (NYSE: BX) posed to the company at the time. As CoreWeave signed additional customers, the company shifted from private credit deals to lower-cost bank financing. CoreWeave's first taste of investment-grade financing came in March, when it secured an $8.5 billion financing backed by a Meta contract. Wall Street assessed the risk of this deal based on Meta's high credit rating rather than CoreWeave's junk rating, bringing the borrowing cost down to approximately 6%. Other companies have begun to follow CoreWeave's lead. Last year, Elon Musk's xAI needed to purchase Nvidia chips to equip its Colossus 2 data center, so it raised funds through an SPV, including equity investment led by Valor Equity Partners. Apollo provided nearly $11 billion in debt financing for this deal. Apollo and Blackstone Group LP (NYSE: BX) recently completed a $35 billion debt deal called "Big Sky" to support Anthropic. This was the first transaction of the AI XPV platform jointly established by Broadcom, Apollo, and Blackstone Group LP (NYSE: BX). The platform can support 20 gigawatts of computing capacity; Bank of America strategists estimate that by mid-2029, this could require $235 billion in backstop-supported debt financing. The deal established a special financing entity that borrows to purchase chips, which Anthropic then leases. Broadcom provides backstop support, meaning if Anthropic defaults, the chips will be re-leased or sold to repay remaining debt, with the chipmaker covering the shortfall. This support enabled two senior tranches backed by Broadcom in this financing vehicle to obtain investment-grade ratings. The largest tranche pays a 5.75% interest rate, lower than what Anthropic could obtain financing on its own as an unrated private company; the riskier $4.5 billion subordinated tranche was priced at 8.5%. Ross McAdam, head of Americas alternative debt at L&G Asset Management, said: "There may be many risks in this industry, but some financing structures mitigate these risks better than others." In August, Nvidia convened a powerful alliance comprising Apollo, Blackstone Group LP (NYSE: BX), BlackRock, Brookfield Asset Management, KKR, and Goldman Sachs to raise financing for AI infrastructure; Nvidia will provide up to 25% backstop support for individual financing projects. Bloomberg reported this month that Broadcom has held preliminary discussions about arranging financing to help OpenAI purchase custom chips jointly developed by the two companies. However, to truly achieve scale, the industry needs to move from private markets to a debt financing market where banks underwrite and distribute to institutional investors; in this market, banks arrange bonds and loans, then sell them to institutional investors for trading. Earlier this year, CoreWeave was the first to enter this market through chip financing deals, with two leveraged loans receiving strong investor demand. But the ultimate goal is to bring these SPV structures into the much larger investment-grade bond market — one of the world's deepest and lowest-cost pools of capital. This financing innovation has lowered the funding threshold for some projects while also concentrating risk among a small number of counterparties. Broadcom's support mechanism is: after customer default, first sell or re-lease the chips to repay debt, then cover the agreed shortfall. If industry demand, rents, and chip residual values weaken simultaneously, customer debt-servicing capacity and collateral value could decline in tandem, and risk would flow back to the guarantor. Matching loan repayment schedules to the five-to-six-year depreciation cycle can reduce residual value exposure, but what truly supports the debt is still the ongoing fees charged once computing power comes online. As a result, investment value depends more on customer credit, project delivery, contract execution, and cash recovery than on headline contract totals alone. Bond declines reveal credit risk, but the forces seeking to assetize AI compute are still fighting to expand financial rules. CoreWeave's company-level junk bonds have recently been hit, with some bonds falling to about 80 cents on the dollar, pushing yields up to about 15%, as investors worry about its continuous debt expansion. However, the market's view on its two chip-backed leveraged loans is somewhat different. Both loans have declined slightly in price but remain close to par. After the selloff, CoreWeave CEO Mike Intrator said in a statement to Bloomberg that building a new type of tech company means the market sometimes needs to digest and clarify questions about AI adoption. He said: "This scrutiny is important, but equally important is recognizing that each company's technology, customer commitments, financing structures, and execution records are different. We are confident in our business model, our technology, our execution quality, and the ongoing rigorous discipline underpinning our financial system." As capital floods in, lenders are also facing risks. Since most chip financing is private transactions, investors find it difficult to easily sell their holdings, and these deals have already bound together a small number of chipmakers, cloud computing giants, and neocloud companies. This exposes investors to highly concentrated risk tied to a small group of interconnected companies. Dave Snyder man, managing partner at Magnetar and global head of alternative credit and fixed income, said: "Big companies will get bigger. The incumbent leaders will likely win because only they can access capital." Another risk lenders face is how solid customer contracts really are. Protective clauses in contract documents may not be as ironclad in practice as imagined — this has already occurred in riskier credit markets. If AI returns disappoint, tech companies may use their influence to force lenders and neocloud companies to renegotiate deals or leases. Akhil Bansal, head of asset-backed financing at Carlyle Group, said everyone assumes these contracts are airtight and unbreakable, but "I look at the actual situation. If essentially seven companies provide all the credit support needed for GPUs, then who has the bargaining advantage?" Complexity has led some investors to stay on the sidelines. Laura Parrott, head of private fixed income at Nuveen, said: "This is a novel structure. We haven't yet seen how it would operate once some kind of disruption occurs." She added that until the market develops further, she would temporarily refrain from lending to these large investment-grade-rated chip deals. As the chip market evolves and underlying chip architecture technology iterates, the mechanisms used to finance hardware will also evolve. Early research and practical use to date suggest that chips can remain usable longer than current accounting treatment implies, which would make them easier to finance. Fang Fang, head of global infrastructure and sustainable finance and co-head of the Global Capital Solutions team at Bank of America, said a system similar to the Kelley Blue Book for new and used car valuations could emerge in the semiconductor market, driving the development of chip trading and hedging markets. She said: "When we accumulate enough historical data and usage records for chips, we will begin to see a more mature leasing market." Once OpenAI and Anthropic go public, raising chip debt financing may also become easier, especially if they can obtain investment-grade ratings and organize financing deals on their own. Blackstone Group LP (NYSE: BX)'s Watson said the ultimate goal of Nvidia, Blackstone Group LP (NYSE: BX), and their Wall Street peers is to turn a unit of computing power into an asset class, enabling people around the world to "finance compute because we understand the economic value of compute."
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