The AI boom teeters on a capital balancing act

Apollo Global Management

Today 13:00

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Sebastian  Pellejero
NEW YORK, Nov 3 (Reuters Breakingviews) - The artificial intelligence boom is wearing investors out. Shares of compulsive data-center builder Oracle have whipsawed on hopes that it will burn less cash. SpaceX SPCX.O and Anthropic faced difficulties in tapping fresh debt, while pulled listings from upstarts AirTrunk and Vitro suggest that equity markets will drive a hard bargain over filling any funding gap. Delivering the $1.8 trillion project pipeline tracked by Cushman & Wakefield depends on an ever-more-fraught balance between the two sides.
Consider planning a 100-megawatt data center. At Cushman’s cost benchmark, construction would require roughly $1.8 billion even before a single chip is installed. Lenders may cover 70% to 85% of that sum, according to broker JLL.
A five-percentage-point retreat in the share lenders are willing to put up would therefore force investors to contribute 17% to 33% more equity per project. Across the estimated pipeline, it works out to an additional $90 billion. Money earmarked for future sites might need to be reassigned to fewer projects, limiting expansion.
Debt markets are already becoming more discriminating. In October, Elon Musk-run SpaceX announced a $40 billion deal for chips backed by private lender Apollo Global Management APO.N. It came at a price well above what comparably rated borrowers are generally charged, Semafor reported. Chipmaker Broadcom AVGO.O intervened to salvage a $63 billion pact for Claude maker Anthropic, according to the Wall Street Journal. Worse, the AI lab may struggle to obtain an investment-grade seal of approval from ratings agencies, the Financial Times reported.
Then there’s Oracle ORCL.N. Chaired by Larry Ellison, the company has poured billions into server farms for ChatGPT developer OpenAI. Shares jumped roughly 11% on October 28 after it outlined plans to conserve cash and limit additional capital raising to $20 billion, offering some reassurance, even as analysts polled by Visible Alpha expect negative free cash flow of $58 billion through this financial year and next. The cost of insuring against a company default for five years fell 16% below its October 20 peak, LSEG data show. 
Oracle soon exhausted the headroom, announcing a $20 billion raise, half of it in bonds. It is a fresh test of investors' appetite after a quieter September, when global AI debt issuance of only $23 billion, roughly half August’s total, according to Morgan Stanley. 
There might be little alternative, judging by reticent equity investors. Nvidia-backed data-center builder Firmus scrapped a $5 billion listing, while Blackstone-backed AirTrunk postponed its $1.5 billion offering. Shares of Australia’s NextDC NXT.AX, meanwhile, plunged 44% on October 21 after grid delays deferred customer revenue, forcing the company to halt new developments. Despite AI's limitless ambition, investors' patience has a price.
     
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CONTEXT NEWS
Oracle said on October 28 that it expects capital expenditures to peak in its current fiscal year and pledged to raise only $20 billion in further financing to fund its AI-focused build-out through fiscal 2030. On November 2, the company said it would raise $20 billion split between stock and bond offerings. 

(Editing by Jonathan Guilford; Production by Maya Nandhini)
((For previous columns by the author, Reuters customers can click on PELLEJERO/ Sebastian.Pellejero@thomsonreuters.com))