Debt investors become cautious as AI businesses borrow billions

Debt Markets Signal Caution Even as AI Stocks Rally

Investors in the stock market continue to show strong optimism around artificial intelligence, pushing AI-related shares to record highs this year. However, debt markets are sending a more cautious signal, with lenders demanding higher interest rates from newer and riskier AI companies.

Several young firms building AI data centres are being forced to pay significantly higher borrowing costs, reflecting investor concerns about execution risks and uncertain future demand. Applied Digital, for instance, issued debt at an interest rate nearly 70% higher than comparable companies, highlighting scepticism among bond investors.

Some AI-related bonds have also fallen in value after issuance, while the cost of credit default swaps — insurance against default — has risen, indicating growing risk perception. Investors worry that construction delays or slower-than-expected demand for AI computing could leave companies struggling to service their debt.

This contrasts with equity investors, who are more willing to take risks due to the potential for large upside. Debt investors, by contrast, focus on downside protection, as their returns are limited to fixed interest payments.

More than $100 billion has been raised this year to fund AI infrastructure, largely by major technology companies with strong balance sheets. Amazon, for example, raised $15 billion at market rates to expand its cloud business. Smaller firms, however, have had to offer higher yields to attract lenders.

Wulf Compute raised $3.2 billion at a 7.75% interest rate, while Cipher Compute raised $1.7 billion at just over 7%. Applied Digital paid even more, issuing debt at 9.25%. These rates are well above the average for similarly rated companies.

CoreWeave, which rents computing power to firms such as OpenAI, Meta and Microsoft, also borrowed at high rates and without collateral. Its bonds have since fallen in price, pushing yields above 12%, a sign of growing investor concern.

Analysts say reliance on a small number of large customers and the risk of overbuilding data centres are key worries. While major technology companies are unlikely to be severely affected, smaller AI infrastructure firms could face pressure if market conditions weaken.

Recent equity market pullbacks in speculative AI stocks suggest sentiment is becoming more cautious. As borrowing increases and uncertainty remains high, investors are closely watching whether the rapid expansion of AI infrastructure can deliver sustainable returns.