Key points
- Lenders want more guarantees from Nvidia
- The fight is over how long a chip earns
- Customer contracts and supplier guarantees helped close deals
Nvidia (NVDA) wants lenders to finance its AI chips the way they finance airplanes: as assets that can earn money for years. But banks and credit investors want stronger guarantees before backing its $500 billion chip-backed financing plan, Reuters reported. The question is how much the chips will be worth if borrowers can't pay.
Yesterday, we covered Nvidia's talks with insurers about sharing that risk. Today's report helps explain why: lenders want more protection than Nvidia initially offered.
What do lenders want?
Nvidia launched the plan in August with financiers including Blackstone, Apollo, and KKR. The company has said some deals could carry no more than a 25% residual value guarantee. The guarantee would give lenders some protection against the hardware losing value if a borrower defaults.
Three banking sources told Reuters that may not be enough. They said Nvidia may need to offer guarantees on all of its deals, or the loans may need to be backed by revenue from an investment-grade customer, such as a big tech company. One source said tens of billions of dollars of deals in the pipeline are likely to carry strong guarantees and contracts.
Nvidia didn't directly answer Reuters' questions about bigger guarantees. A spokesperson said its "AI compute is a productive, durable and fungible asset that can support long-term financing," and that "financing structures will vary as this market develops."
How long does a chip earn money?
This is the real argument. Jensen Huang has said Nvidia's GPUs have a useful life of up to a decade. Lenders aren't so sure.
"Banks typically underwrite GPUs over a 3-4 year depreciation schedule," said Tony Trzcinka, a senior portfolio manager at Impax Asset Management. "That is different than Nvidia which argues top-tier GPUs can earn revenue for a decade."
Andrew Chang of S&P Global Ratings gave Nvidia some credit. "Nvidia would imply that the GPUs work well north of five years, and that actually has been proven to be true thus far," he said. Still, "we take a conservative view of the value of those chips."
Nvidia pointed to studies showing big cloud companies stretching server depreciation to five or six years, and to a valuation firm, Barkr, that estimates its newest GB300 NVL72 systems could last 9 to 10 years. For lenders, that difference affects how much they will lend and how quickly they want repayment.
What made lenders comfortable?
Strong customer contracts or a supplier willing to guarantee the financing. CoreWeave (CRWV) closed an $8.5 billion GPU-backed loan this year that's rated A3, largely because lenders rely on Meta's contract payments. Broadcom (AVGO) backstopped more than 80% of a $35 billion financing structure tied to Anthropic, according to Reuters.
That's the same Broadcom that, according to Anthropic's IPO prospectus, agreed to lend Anthropic up to $42 billion to help pay for computing built on chips it helped design. Nvidia has gone down a similar road before, with residual value guarantees capped at $105 billion on data center leases tied to OpenAI.
My reading is that lenders aren't comfortable relying on the chips alone. Customer contracts and guarantees from the chipmakers are doing much of the work. "The precedent transactions so far would suggest that the creditor community does not subscribe to long average lives for these assets," said Brian Gelfand, co-head of global credit at TCW.
Put that together, and the open question is how much risk Nvidia keeps on its own books to get these loans done. Nvidia shares rose about 1% on Thursday.
