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A measure of credit risk at Elon Musk’s SpaceX hit a record high while its bonds fell after the Rockets-to-AI Group’s new plans to raise $40 billion in debt to buy Nvidia chips spooked investors.
The spread on SpaceX’s five-year credit default swaps widened to 194 basis points on Wednesday after the FT reported on fundraising plans, meaning it now costs $19,400 a year to protect $1 million of its debt against default. CDS started trading in June around 110 bp.
Investors were also selling SpaceX’s debt, pushing the yield over Treasury bonds on its 2056 bond up 0.09 percentage points to 2.36 percentage points on Wednesday, according to MarketAxess data. The spread, a measure of the premium investors demand to hold bonds over very low-risk U.S. government debt, recorded 1.75 percentage points in June.
SpaceX is seeking to raise $10 billion in bank loans and $30 billion in investment-grade debt to finance its chip purchases, the FT reported on Tuesday. Private equity firm Apollo was to lead the deal, while bond giant Pimco was among the lenders in talks to finance it.
This comes after the company issued $25 billion of investment-grade debt in June, just weeks after raising $86 billion in its historic IPO. The new debt deal suggests Musk is doubling down on Nvidia’s technology.
Adam Jonas, an analyst at Morgan Stanley, said this week that some investors were skeptical that Musk’s company could achieve “success as a major provider of cutting-edge AI models” or launch “any amount of orbital computing at any time horizon.”
“I regularly give presentations to large groups of clients and ask the room, ‘Who here owns (SpaceX) stock?'” Jonas wrote in a note to clients. “Last night, when I did this in front of 40 customers, not a single hand went up.”
The $40 billion fundraising is the latest in a series of blockbuster debt deals led by Silicon Valley’s leading tech groups to finance the construction of AI infrastructure in the United States. Hundreds of billions of dollars in bonds and loans have been issued by companies like Alphabet, Meta, Oracle and Amazon in public and private markets.
CDS of other technology companies that borrow huge sums to finance AI projects have also been under pressure in recent weeks.
The cost of Oracle’s five-year CDS has climbed 40 bps since the start of last month to 244 bps. The same CDS for chipmaker Nvidia rose to around 81 basis points from 45 basis points in early July.
Equivalent contracts for Alphabet, Meta and Microsoft have also surged in recent weeks and are now listed near record levels.
“Everyone is looking for ways to protect themselves against a setback” in the AI investment sector, said a US banker specializing in capital markets.
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