Lenders Look Beyond AI Claims as JPMorgan Signals Shift in Financing

JPMorgan says AI companies must prove their financial viability to attract lenders, as investors increasingly look beyond artificial intelligence branding and focus on whether businesses can sustain spending, repay debt, and generate cash.

“The AI label alone is no longer enough to reassure lenders. Companies must show that they can finance investment, service their debt and eventually turn spending into cash flow,” Justin Biemann, global investment strategist at J.P. Morgan Private Bank, said in an Oct. 23 report.

Elon Musk expressed similar concerns on Sunday, warning that debt financing is becoming less available to AI neocloud providers, which rely heavily on data centers to deliver their services.

The shift could have consequences for cryptocurrency markets, where AI enthusiasm has helped encourage risk-taking. Bitcoin and Nvidia both reached lows within weeks of ChatGPT’s debut in late 2022, followed by substantial rallies. If confidence in the AI sector deteriorates, the resulting pullback could also affect digital assets.

Investors are already questioning whether the industry’s heavy capital spending will produce sufficient returns. Since Oct. 6, the Nasdaq has declined 6.7%, falling from 31,360 to 29,263. AI-linked stocks, including Nvidia and Oracle, have recorded steeper declines than the broader index.

Rising Credit Costs Put AI Financing Under Pressure

The concerns extend beyond equities into credit markets, where the cost of protecting against defaults on debt issued by several AI-related companies has reached record levels.

Credit default swaps (CDS) provide investors with insurance against certain borrower defaults. Buyers pay an annual premium, measured in basis points, in exchange for protection if a specified credit event occurs. At 100 basis points, insuring $10 million of debt costs $100,000 annually. Higher spreads generally indicate growing concerns about a borrower’s ability to repay.

Morgan Stanley reported that weekly CDS trading linked to bonds issued by Oracle, SpaceX, Alphabet, Amazon, Meta, Broadcom, and Nvidia averaged more than $9 billion in September. That compares with less than $2 billion per week in July.

Companies that rely heavily on debt to fund large-scale AI infrastructure investments appear to face the greatest pressure.

Biemann highlighted an unnamed AI infrastructure firm carrying tens of billions of dollars in debt and other obligations. Its five-year CDS spread has reached 1,100 basis points, pushing the annual cost of insuring $10 million of its debt above $1 million.

He said pricing at these levels implies a five-year default probability approaching or exceeding 50%, compared with below 30% a year earlier.

JPMorgan Views CDS as a Warning Signal

Biemann pointed to Lehman Brothers as a historical example of credit default swaps signaling financial trouble ahead of a collapse. The bank’s CDS spreads averaged below 100 basis points in the third quarter of 2007 before climbing above 1,400 basis points by mid-September 2008, when Lehman filed for bankruptcy and global markets came under severe pressure.

However, he cautioned that elevated spreads do not necessarily mean a default is imminent. Investors should treat them as indicators of rising risk rather than a countdown to financial failure.

According to Biemann, trading activity tied to major AI companies currently looks more like portfolio hedging than widespread positioning for an immediate crisis.

Large AI companies with strong cash flows pay around 50 to 120 basis points for five-year credit protection. He said those levels remain more consistent with investors purchasing insurance than anticipating severe financial distress.

Some established infrastructure borrowers have seen their spreads approach 300 basis points, while the broader investment-grade market remains relatively stable.

The main risk lies with businesses that need continued access to borrowing while maintaining high spending and generating limited cash. As lenders become more selective, AI companies will need to demonstrate that their investments can deliver sustainable cash flow and support their financial obligations.