JPMorgan: AI Label No Longer Guarantees Funding

The AI label is no longer sufficient for securing funding: lenders are assessing the business and financial viability of a company, according to a JPMorgan report dated October 23. "Companies need to demonstrate that they can finance investments, service debt, and ultimately convert expenses into cash flow," said Justin Beeman, global investment strategist at J.P. Morgan Private Bank.

On Sunday, a similar warning was issued by Elon Musk: debt financing is drying up for specialized AI cloud providers whose revenue almost entirely depends on data centers. This is important for the crypto market: AI was one of the most powerful ideas pushing investors towards risk, including Bitcoin. BTC and Nvidia hit bottom within weeks after the launch of ChatGPT at the end of 2022 and have since risen significantly, so instability in AI could spill over to cryptocurrencies.

Pressure is also visible in credit markets: the cost of default insurance on the debts of several AI companies has reached record levels. The instrument is a credit default swap: at 100 basis points, insuring $10 million of debt costs $100,000 per year. Nasdaq has fallen 6.7% from October 6 to 29,263 from 31,360, with Nvidia and Oracle dropping more than the index.

The picture is particularly troubling for companies most reliant on debt. Beeman, without naming the company, speaks of one AI infrastructure borrower with tens of billions of dollars in debt: the cost of five-year insurance on its debt has jumped to 1,100 basis points, meaning protection for $10 million would cost more than $1 million per year. "Such a price implies a probability of default within five years of around or above 50% compared to less than 30% a year ago," Beeman wrote.

Beeman cites Lehman Brothers as an example of an early warning: in the third quarter of 2007, insuring its debt cost less than 100 basis points, and by mid-September 2008, it exceeded 1,400. According to him, today these indicators can be viewed "as warning lights, not countdown clocks": AI companies are not necessarily following the path of Lehman.

Activity in insuring the debt of major AI leaders is more akin to portfolio protection: companies with strong cash flow pay 50–120 basis points for five-year protection. Some established infrastructure borrowers have approached 300 basis points. "Concern is limited to business models that need debt markets to remain open while expenses are high and cash flow is limited," Beeman concluded.