Lenders seek solid business viability as AI firms face increased credit risks and rising insurance costs on debt defaults
Funding for AI firms now requires more than just a label, according to JPMorgan.Investors need assurance of business viability and cash flow, said Justin Biemann of J.P. Morgan Private Bank.
Elon Musk echoed the concerns, highlighting a decline in debt funding for AI-focused companies reliant on data centres.
These challenges could impact cryptocurrency markets as AI has driven significant risk appetite, affecting assets like bitcoin.
Since the launch of ChatGPT in late 2022, both bitcoin and Nvidia have seen substantial increases after initial declines.
Market concerns
Nervousness is growing over whether AI’s potential will translate into tangible profits.
The Nasdaq has dropped 6.7% since early October, with AI-related stocks like Nvidia and Oracle declining even more.
Rising concern is evident in credit markets, where the cost of default insurance for AI firms has reached new highs.
Insurance called credit default swaps (CDS) are now more expensive, indicating heightened risk perception.
Recent data from Morgan Stanley shows CDS trading volumes tied to major AI companies surged to over $9 billion in September.
One heavily indebted AI firm has seen its CDS soar to 1,100 basis points, indicating a significant default risk.
Biemann likens current CDS pricing to early warning signals for potential financial distress.
He references Lehman Brothers, whose CDS predictions were indicative of its eventual collapse.
High CDS spreads suggest more than a 50% default probability for some AI firms, compared to under 30% last year.
Despite these signals, larger AI firms with solid cash flow still maintain relatively lower CDS costs.
Prices for larger AI firms remain more indicative of portfolio insurance than an impending crisis.
Concerns mostly centre on business models that depend heavily on continued access to debt financing.
Maintaining cash flow amid high spending remains a critical challenge for many AI-related companies.
