CoreWeave CDS spreads exceeded 1,000 bps — CNBC

The spread on CoreWeave's five-year credit default swaps (CDS) exceeded 1,140 basis points during trading on Thursday and later stood at nearly 1,038 points. This is 16% higher than a week ago and 164% higher than a year ago, CNBC reports.

Signs of credit stress

CDS are contracts that insure against a borrower's default: a widening spread means that market participants view a company's debt as riskier. Gavan Nolan, executive director for fixed-income pricing at S&P Global Market Intelligence, noted that a level of 1,000 basis points is usually considered a sign of credit stress.

The yield to maturity on CoreWeave's 9.75% coupon bonds maturing in 2031 reached 15.78%. Bond yields move in the opposite direction to their prices. The company has more than $51 billion in debt and other obligations, which it uses to finance the buildout of artificial intelligence infrastructure.

Investor reaction

CoreWeave shares initially declined during Thursday but ended the session up 5.94%. The previous day, the company's shares fell 15.5%. Shares of other companies providing cloud computing for AI were also under pressure: Nebius closed up 1.29% after falling, while Iren ended trading down less than 1%.

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Nolan said demand for CoreWeave's services is not in doubt, as the company has contracts with major hyperscalers. At the same time, he pointed to the company's significantly negative free cash flow and the need for incoming funds that would justify its capital expenditures.

The company's and market's position

CoreWeave CEO Mike Intrator said in a memo obtained by CNBC that the market may misunderstand a new technology company and that its order backlog more than covers all debt obligations. According to Deutsche Bank's estimate, this backlog exceeds $100 billion, with about two-thirds attributable to investment-grade counterparties, including Microsoft, Meta, IBM, and Caterpillar.

Amid concerns about debt in the AI sector, the spread on Oracle's five-year CDS also rose, to 282 basis points, about 10% over the week. Jim Reid, head of global macro and thematic research, noted that a downgrade of Oracle from BBB could trigger forced selling by investors permitted to invest only in investment-grade securities.