From CoinDesk · By Omkar Godbole
JPMorgan said the AI label no longer guarantees financing, as lenders increasingly demand evidence that companies can fund investments, service debt and generate cash flow.
Credit-default-swap trading tied to major AI companies surged in September, while the cost of insuring some debt-dependent firms reached levels signaling heightened default risk.
JPMorgan said the stress is concentrated among businesses reliant on continued borrowing, but warned that a deeper AI downturn could spill into other risk assets, including Bitcoin.
An AI label alone doesn't secure funding as lenders now weigh a firm’s business and financial viability, according to JPMorgan.
“The AI label alone is no longer enough to reassure lenders. Companies must show that they can finance investment, service their debt and eventually turn spending into cash flow,” Justin Biemann, global investment strategist at J.P. Morgan Private Bank, said in a report published Oct. 23.
Elon Musk issued a similar warning on Sunday, saying debt funding is drying up for AI neoclouds, firms whose revenue depends almost entirely on data centers.
That matters for crypto. AI has been one of the most potent narratives driving risk-taking across financial markets, bitcoin included. Bitcoin and Nvidia both bottomed within weeks of ChatGPT’s debut in late 2022 and have rallied significantly since. Instability in AI could therefore spill over into crypto.
These warnings come as markets grow uneasy over whether AI’s promise will show up on balance sheets. The tech-heavy Nasdaq has slid 6.7% to 29,263 from 31,360 since Oct. 6, with AI-linked firms such as Nvidia and Oracle falling more than the index.
The stress is showing up in credit markets too. The cost of insuring against defaults on the debt of several AI-linked firms has hit record levels. This insurance is called a credit default swap (CDS). The buyer pays a yearly premium, and if the borrower goes bankrupt or fails to pay, the buyer gets a large payout. The premium, also known as the spread, is quoted in basis points. At 100 basis points, insuring $10 million of debt costs $100,000 a year. A wider spread means investors want more compensation to take on the credit risk.
The scramble for CDS shows in volumes too. According to Morgan Stanley, weekly trading in CDS linked to bonds issued by Oracle (ORCL), SpaceX SPCX, Alphabet GOOG, Amazon AMZN, Meta META, Broadcom (AVGO) and Nvidia NVDA averaged more than $9 billion in September, up significantly from under $2 billion a week in July.
The picture is particularly worrying for the most debt-dependent firms. Without naming it, Biemann said one financing-dependent AI infrastructure company has taken on tens of billions of dollars in debt and other obligations. Its five-year CDS jumped to 1,100 basis points, so insuring $10 million of its debt would cost more than $1 million a year.