① At present, bonds and loans financing AI infrastructure are seeing yields surge into double digits. Bankers note that transferring risk to insurers and other investors has become increasingly difficult; ② Castle Securities also cautions clients that even the largest companies in the tech sector could find themselves drawn into the fray as they finance numerous projects critical to their AI ambitions.
Cailian Press, October 28 (Editor: Zhao Hao) — As Wall Street funds the sprawling network of data centers and chips driving the AI boom, a new anxiety is looming: early signs suggest that the credit market's capacity to absorb debt is nearing its limit.
At present, yields on bonds and loans financing AI infrastructure are surging into double digits. Bankers are finding it increasingly difficult to transfer risk to insurers and other investors.
Elon Musk recently warned that, as companies are unable to secure additional financing, hundreds of so‑called "neoclouds" face the risk of collapse. These anxieties have been intensifying week by week, further fueling concerns about potential economic repercussions.
Castle Securities also cautions clients that even the largest companies in the technology sector could become entangled as they finance numerous projects critical to their AI ambitions. This risk is increasingly evident in the credit default swap (CDS) market, which banks and other lenders use to hedge their exposure.
Recently, the cost of purchasing default insurance for the debts of companies such as Broadcom, SpaceX, and Oracle has risen sharply, and the impact has already begun to spread to the broader credit market.
It should be noted that Castle Securities did not predict an imminent credit crunch; just this week, tech giants have already managed to raise tens of billions of dollars in new financing. However, in a sense, this is not the heart of the matter.
What is truly alarming is that, over the next few years, tens of trillions of dollars in new debt will still be required—yet there appears to be a growing disconnect among how much Silicon Valley executives believe they can raise, how much funding institutions claim they can provide, and how much debt asset managers are willing to take on.
Tucker Roberts, an analyst at Castle Securities, stated: "When such a massive supply of debt is about to flood the market, at some point the challenge may no longer be finding investment-grade issuers to underwrite it, but rather identifying buyers who are genuinely willing to continue assuming the risk—since that risk ultimately stems from the same small handful of investment-grade entities providing support."
Customer exit clauses are rife with hidden risks, narrowing the scope for banks and insurers to assume liabilities.
More than 30 bankers, fund managers, and private-equity executives who have been involved in recent and ongoing data-center financing negotiations all acknowledge that raising capital has become significantly more challenging compared with just a few months ago.
A key reason is that investors are increasingly concerned about cancellation rights and other exit clauses in contracts: once a major customer pulls out, they may be left to shoulder the risk on their own. Last month, Oracle issued a force majeure notice, seeking to postpone payments amid delays in the delivery of a large data center in New Mexico, a move that further heightened these concerns.
One hedge fund stated that it had discovered the counterparty to the contract retained the right to terminate if project delays exceeded three months, and accordingly declined a recent data-center transaction. At a top‑ten law firm, a partner who has advised on data-center development financings has also encountered similar provisions: if project delays reach or exceed 180 days, the colocation customer may exercise its right to withdraw.
Another major challenge is how to transfer risk and create room for new transactions.
The head of technology, media, and telecommunications lending at a major European bank said that, given the bank's already substantial exposure in this sector, its loan capacity for the industry is nearing its limit. The executive added that selling debt or transferring risk could take up to five months, constraining the bank's ability to recycle capital and deploy it into new financing.
A survey by Willis Towers Watson reveals that some insurers, which frequently share credit risk on such loans, had already indicated months ago that their exposure to data center risks was approaching or had reached its limit.
Financing costs continue to rise, with major Wall Street firms issuing repeated warnings.
Rising interest rates are also weighing on data center operators, particularly in the asset-backed securities (ABS) market. In such transactions, rental income is typically locked in through long-term leases.
Morgan Stanley ABS strategist Carolyn Campbell said earlier this month on a podcast: "In early 2026, the yields on top-rated data center bonds were still below 5%. Today, yields on similar bonds have approached 7%. For companies seeking to finance multi-billion-dollar facilities, such an increase is highly significant. When borrowing costs near 8%, issuing these bonds becomes much more challenging."
She noted that, so far this year, the combined issuance of data-center‑related debt in the ABS and commercial mortgage‑backed securities (CMBS) markets has totaled roughly $22 billion, yet despite the substantial capital required for development, the pace of issuance has barely matched last year's level. In many respects, Citadel Securities' warning echoes the views of other major Wall Street firms.
After visiting the San Francisco Bay Area earlier this year, Diameter Capital Partners began to wonder whether the tech industry has become "overly complacent," to the point of believing that "unlimited debt capital is available—enough to finance an AI infrastructure worth $5.5 trillion."
In a letter to investors, the firm's managing partners, Scott Goodwin and Jonathan Lewinsohn, wrote: "Not all business models are sustainable."
Armen Panossian, Co‑Chief Executive Officer of Oaktree Capital, said the firm has become "extremely, extremely cautious" about the structuring of data‑center transactions and the quality of their underlying assets. He cited risks such as technological disruption, construction delays, regulatory hurdles, and power‑supply challenges.
During a recent webcast for clients, Panossian stated: "Over the past few weeks, we've observed these credit spreads widening. This suggests that the credit market is either nearing its capacity limit, with underwriting of existing loans becoming saturated, or is beginning to factor in certain latent risk factors."
Risk events have been unfolding one after another, with at least 18 financing deals posting double-digit returns.
In recent weeks, some of these risks have suddenly surfaced, sending shockwaves through the market. Following Oracle's issuance of a force majeure notice, concerns about OpenAI's revenue forecasts resurfaced, and CoreWeave's stocks and bonds also suffered heavy losses.
CoreWeave, once a little-known emerging cloud service provider, has now become a new barometer of market concerns about the AI bubble. Recently, three public offerings or proposed IPOs by AI infrastructure companies—Elice, Firmus Grid, and Nscale—have also run into setbacks one after another, further signaling weak investor demand.
Tony Trzcinka, portfolio manager of investment-grade bonds at Impax Asset Management, said that AI has become the top priority at the firm's internal credit strategy meetings, and the company currently maintains an underweight stance on data-center debt.
He said, "Market reactions have confirmed just how closely these credit risks are interconnected and how deeply they depend on the same pool of underlying mortgage assets."
Compiled data show that, in the junk bond and leveraged loan markets, at least 18 data center financings currently yield double-digit returns. Even new deals are feeling the pressure. To entice investors to subscribe to a $5 billion syndicated loan from the emerging cloud service provider Volta Infrastructure Holdings, JPMorgan and Goldman Sachs had to offer a larger issuance discount and higher interest rates, pushing the loan's yield above 11%.
Risk is concentrating among tech giants, and the cost of default insurance has reached a record high.
Roberts of Castle Securities notes that credit investors are beginning to recognize that the substantial debt that emerging cloud service providers will still need to raise in the future may ultimately depend on support from tech giants, which themselves face massive financing needs.
He added that, whether through explicit guarantees, long-term contracts, or simply because the market expects them to step in when projects run into trouble, chipmakers and hyperscale cloud service providers may find themselves bearing an increasingly large share of the risk.
This unease is particularly evident in the CDS market. The cost of purchasing default insurance on Oracle's debt hit a new all-time high last week; this metric is widely regarded as a barometer of risks across the broader AI boom. Similarly, the costs of default protection for SpaceX, NVIDIA, and Meta have also reached record highs.
John Yovanovic, Co-Head of Leveraged Finance at MetLife Investment Management, said: "The banks and companies handling the financing have made it very clear: they don't mind issuing new bonds at a higher spread, even if that drives down the price of the bonds you've already purchased. So what you're looking at is a financing deal where, even if the long-term returns are attractive, the price is likely to fall below par in the short term. Who would want to enter under such pressure?"
Realizing profits has become the key, and investors are accelerating their project screening.
Of course, if hyperscale cloud service providers can demonstrate that their profit growth keeps pace with substantial upfront capital expenditures, the credit markets may once again be willing to finance even the most speculative projects.
However, at present, fund managers are becoming increasingly selective about which projects to lend to and at what pricing.
A source familiar with the matter revealed that KKR is steering clear of remote data centers, concerned that these facilities may be difficult to repurpose once their leases expire. Meanwhile, The Carlyle Group has passed on several recent deals, citing its emphasis on portfolio diversification and rigorous due diligence.
Felicity Juckes of TwentyFour Asset Management said, "People are increasingly aware that their exposure in this sector is overly concentrated." Investors "will become ever more discerning."
Editor/Deng