A few charts worth discussing
“CCC-rated loan spreads are now at their widest level outside of the financial crisis, oil going to $8 in 2016, and the COVID-19 pandemic...while high yield spreads trade at all-time tights. There i’s a credit crisis brewing and nobody knows.”
“EU bank deposits as a percentage of household assets are well above the global average at over 30%.”
Other charts worth pointing out
S&P 500 Index market cap weight, by sector
Affiliated investments by private capital-backed insurers
Software vs. S&P 500 index – performance comparison
Canada & the U.S. – home prices vs. incomes
Job postings – software engineers vs. total
U.S. new business applications
S&P 500 Index performance – 10 largest stocks vs. the next 40
Tech groups turn to more chip-backed loans to fund AI arms race
Tech companies are increasingly turning to loans backed by the chips on which their large language models are trained as they hunt for ways to fund their massive AI investments.
Such loans, which are secured against graphics processing units and backed by leases to the tech groups, are popular with a sector burning hundreds of billions of dollars a year in an AI arms race on chips that can quickly become obsolete.
Investors have been attracted by yields in the high single digits to mid-teens, which are typically higher than those on debt issued by the tech companies themselves.
Pioneered by cloud computing provider CoreWeave in late 2023, GPU-backed debt has grown in popularity as demand for advanced chips skyrockets and prices soar. Citigroup estimates that GPUs and associated servers can account for 30 to 40 per cent of total project costs for data centres.
The loans are typically taken out by special-purpose vehicles formed by tech companies and investment firms for the purpose of acquiring a cache of high-performing chips, which would then be leased to the tech businesses to train their AI models.
This arrangement allows Big Tech groups, whose use of debt markets is growing rapidly, to shift the loans off their corporate balance sheets.
Last month, Apollo announced a $3.5bn financing package for a digital infrastructure fund managed by Valor Equity Partners, which would buy Nvidia’s GB200 hardware, known as AI superchips, and lease them to Elon Musk’s xAI.
IREN Limited, an AI cloud service provider, also secured $3.6bn in loan commitments from Goldman Sachs and JPMorgan earlier this month to buy chips for its AI contracts with Microsoft.
Lenders often have to act fast and write big cheques in these transactions, according to a lawyer familiar with GPU financing.
The rising popularity of such loans highlights investors’ clamour for asset-backed finance, where banks and private credit funds seek esoteric debt secured by stable cash flows.
Deals usually come with “hell or high water” clauses that prevent tech companies from terminating the leases early, helping mitigate the risk that these GPUs become obsolete as AI technology quickly evolves.
Moody’s, which has begun to rate GPU-backed debt, said it withdrew credit ratings once underlying leases came to an end.
Nevertheless, some investors remain concerned that the economic life of GPUs could end up being shorter than expected, while the market value of older AI chips is often questionable due to a lack of price history in the nascent industry. Current valuations could also be inflated by short-term chip supply shortages, investors said.
This week’s fun finds
This week, Vishnu from the Technology Team, hosted the most
anticipated moai at EdgePoint. It delivered both comfort and flavour that exceeded the hype.
A total lunar eclipse will shine over Canada! Here’s how to watch from anywhere
Check your weather forecast for clear skies in the hours between midnight and sunrise next Tuesday, for a chance to see the last total lunar eclipse until the end of 2028!
On Tuesday, March 3, the Full Moon will pass directly through Earth's umbral shadow, resulting in a total lunar eclipse.
