Cost of Insuring Against AI Company Defaults Spikes: CoreWeave and Oracle Credit Spreads Widen

As anxiety grows over a potential downturn in the AI boom, investors are increasingly purchasing credit default swaps (CDS) to hedge against the risk of default by highly indebted hyperscalers. This trend has driven up the cost of protecting against debt losses, reflecting market concerns about the massive capital expenditure required to scale artificial intelligence and how quickly revenue will materialize to support it.

Specific data highlights the severity of the shift. CoreWeave's debt load has tripled over the past year. The annual cost to insure $1 million of its bonds against default for five years has risen from under $40,000 a year ago to $100,000 today. This week, CoreWeave bond prices fell sharply, causing yields on the debt to top 15%. Although the company's CEO sent a memo to employees stating that the market was acting "irrationally," the pricing has changed materially.

Oracle is facing similar pressure. The cost of hedging against an Oracle default rose 12% in a single week, with a $1 million policy now costing approximately $28,000. Part of investor concern stems from setbacks in a data-center project in New Mexico that Oracle is building. Last month, Oracle informed lenders, including Blue Owl, that it would defer lease payments and other financial obligations tied to the deal if the datacenter fails to come online as planned in 2028.

"There’s a derivative market. If you want to make a bet that Microsoft could default and not pay their lease, you can go in the derivative market and do that," said Blue Owl CEO Doug Ostro on a recent episode of Compound Interest. "We don’t. But it’s available to us." Meanwhile, new debt deals are struggling. A transaction for Volta Infrastructure faltered this week as investors, feeling saturated with data center debt, demanded higher yields.