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 , Alphabet , Amazon , Meta , Broadcom (AVGO) and Nvidia 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.
