Key points
- Why CoreWeave wants insurance money
- How its chip-backed loans work
- What its bond market is signaling
CoreWeave (CRWV) wants to tap insurance companies' pools of capital to fund its AI build-out more cheaply, co-founder Brannin McBee told the Financial Times in an interview published October 14.
McBee, who leads CoreWeave's financing, said winning investment-grade ratings for more of its chip-backed debt, and eventually for the company itself, would let it borrow from insurers whose capital "is unlimited. Like, that's all the money in the world that sits in the insurance tranche."
Investment-grade ratings are the key
Earlier this year, CoreWeave secured an $8.5 billion loan backed by chips and a long-term contract with Meta Platforms (META) to use them. It was the first of CoreWeave's chip-backed loans to be rated investment grade in full.
The next step is getting insurers to buy loans backed by contracts with lower-rated customers, such as AI labs. "I don't think that non-investment-grade offtakes from us are ready to go into the insurance tranche yet. I do think it'll get there," McBee said. In his view, the big AI labs' planned stock market listings could help those arrangements attract insurers.
In these loans, the chips sit in subsidiaries. McBee said that, under these financing arrangements, roughly 80 cents of each revenue dollar covers debt service and operating costs, leaving about 20 cents for the parent company. The first, a $2.3 billion loan in 2023, carried an effective interest rate of about 15%. CoreWeave has since signed five more at lower rates, securing about $27 billion in total.
CoreWeave's bond yields are climbing
CoreWeave has raised more than $35 billion this year through chip-backed loans, high-yield bonds, convertible bonds, and share sales. Its debt and lease obligations totaled about $52 billion at the end of June, and its interest costs more than doubled from a year earlier to $640 million in the second quarter. S&P assesses its financial risk as "aggressive."
The yield on a CoreWeave bond maturing in 2032 hit nearly 15% on October 13, up about 1.5 percentage points in a week. Jordan Chalfin, a credit analyst at CreditSights, said investors worry about a mismatch between CoreWeave's long data center leases and its shorter customer contracts. "If there's an overbuild, why would [customers] renew their contract with CoreWeave?" he said.
CoreWeave's bonds are one of the inputs to the AI borrowers' spread premium in our AI Bubble Index, which reads 63 out of 100.
McBee says the company has to be huge
Analysts expect negative free cash flow of about $25 billion this year, $28 billion next year, and $18 billion in 2028, according to Visible Alpha consensus estimates. McBee said CoreWeave could still reach investment grade as a whole within "a few years."
"If we stop building today, [we'd be] immensely cash-flow positive," he said. "We are in a period where you have to be huge."
McBee also said CoreWeave is "actively" looking at the $500 billion financing program Nvidia (NVDA) unveiled in August with partners including Goldman Sachs. Insurers could also participate by underwriting risk. Nvidia has held talks with insurers about covering part of the losses on chip-backed loans if borrowers default, a different role from buying CoreWeave's debt. We compared CoreWeave's debt with Oracle's here.
CoreWeave shares were at $71.35 in premarket trading at 9:21 a.m. ET, down 8.3% from their October 13 close of $77.81.
