Lenders Bet Billions On Booming Growth Of AI Chip Industry

"When a major owner of AI chips wanted to raise billions of dollars to buy more, it turned to a crop of Wall Street investment firms for a loan backed by the chips themselves.

CoreWeave, a New Jersey-based startup that owns artificial-intelligence chips and associated computing gear in data centers, raised $7.5 billion last week in one of the largest ever private-debt financing deals. Investment giant Blackstone led the deal, which will fund CoreWeave's expansion in data centers across the globe and help it buy more chips from Nvidia, the main supplier of computational power to the AI boom.

Nvidia's GPU, or graphics-processing-unit, chips are central to the development of the most advanced AI models, ones that produce humanlike text, images and audio. They are expensive and have become harder to get as tech titans such as Amazon and Microsoft spend billions of dollars on them in a competition to build up computing power.

For Wall Street, their utility has given them another kind of power, turning them into assets that can backstop loans.

CoreWeave isn't the only chip owner to have borrowed against its stash. At least three such deals have closed since the AI boom took off last year, raising more than $10 billion for companies that rent access to chips used to create and deploy AI systems such as OpenAI's ChatGPT.

More deals are in the pipeline, the companies and bankers said, underlining the rapid growth of startups that provide AI computation services and the eagerness of credit investors for exposure to the boom.

Getting the capital in the door hasn't been cheap -- deals such as CoreWeave's have come with interest rates significantly higher than bank loans or corporate bonds, ranging in the low double-digits, according to bankers and companies involved in the transactions. The high interest rates reflect the risk these lenders are taking with relatively unproven companies and untested collateral.

But the structure meshes with an AI boom that is moving at lightning speed, with demand for AI computing startups' services rising more quickly than they can show sufficient revenue or profits to entice traditional lenders. CoreWeave's large contracts with customers such as Microsoft helped build confidence among lenders that its financial future was strong.

The costly chip loans could also turn out to be more stopgaps than long-term sources of funding for borrowers as they come into their own financially and can tap more traditional lenders. CoreWeave expects to have $5 billion in earnings before interest, taxes, depreciation and amortization next year, people familiar with its finances said.

"When you're trying to build and scale a company at the speed that we're going, it is access to capital that defines success or failure," said Michael Intrator, CoreWeave's chief executive. The company would move over time toward cheaper ways of raising funds, he said, but for now, "it gets us what we need, which is the powder to be able to move at this size and scale."

All of it hinges on the strength of the AI boom. Demand for AI chips has shown few signs of slowing in recent months, although big tech companies and startups are struggling to generate revenue from AI that would justify the cost of the computing power that underlies it.

Nvidia's earnings on Wednesday are set to provide the latest gauge of demand. Analysts expect its revenue to more than triple to about $24.6 billion in its latest quarter and to rise steadily thereafter. 

Nvidia's stock has almost doubled so far this year; it more than tripled last year.

Blackstone, which invests thematically across its various business lines, was looking for ways to play the AI boom when the CoreWeave opportunity arose in 2023. The private-equity firm had already made a big bet on data centers in its real estate and infrastructure businesses, buying data-center operator QTS in 2021 and in 2023 signing a deal with Digital Realty to develop $7 billion in data centers.

CoreWeave needed a lot of capital. At the time, though, the company was tiny, with only around $30 million in revenue in 2022, according to people familiar with its finances. It did, however, have chips.

Blackstone ended up coleading with hedge-fund firm Magnetar Capital a $2.3 billion financing for CoreWeave, which got its start supplying computing power for cryptocurrency mining before pivoting to AI. Blackstone accounted for $1 billion of that, with investment firms Coatue, DigitalBridge, BlackRock, Pimco, Carlyle and Great Elm also contributing.

The financing deals establish a metaphorical lockbox, housing all of CoreWeave's AI chips. Any revenue the company generates from clients using those chips, the most advanced of which cost tens of thousands of dollars each, goes first toward paying its lenders. Any excess cash after making the loan payment flows to the company as net revenue.

To get comfortable with the structure, Blackstone spent a lot of time talking to Nvidia, asking questions about how the chips worked, whether the technology was going to stand the test of time and whether the chips would retain value when a new generation replaced them, said Jasvinder Khaira, a senior managing director in the firm's Tactical Opportunities group, who helped lead the deal.

"If they were leasing out fleets of Jeep Cherokees, they could go to a bank," Khaira said of CoreWeave. "We were trying to do something that gave us an attractive investment and opened up the market."

Blackstone provided $4.5 billion of the latest CoreWeave financing, spreading the loan out across a number of its investment vehicles.

Investors are likely to become more comfortable with the newfangled legal structures over time, advisers said, which could reduce borrowing costs and lead to more deals.

Activity is already picking up. Lambda Labs, another AI cloud-computing company, raised $500 million in a deal backed by Nvidia's chips in April. Applied Digital, a company that operates data centers and rents out AI chips, is closing in on a financing deal worth hundreds of millions of dollars, Chief Executive Wes Cummins said.

Early on, speaking to investors about the merits of lending vehicles backed by AI chips was extremely difficult, said Stephane Fisch, a principal at Argo Capital who has pitched one such deal.

"When I started doing this, everybody thought I was nuts," Fisch said. "Now people are starting to see the light."" [1]

1. Lenders Bet Billions On Booming Growth Of AI Chip Industry. Fitch, Asa; Gottfried, Miriam.  Wall Street Journal, Eastern edition; New York, N.Y.. 22 May 2024: A.1.