JPMorgan says the CoreWeave debt sell-off poses limited risk to global banks

Siddarth S

Reuters, October 20 - JPMorgan estimated on Tuesday that most global banks have limited risk exposure to CoreWeave (CRWV.O). Previously, this cloud computing company backed by Nvidia saw its stocks and bonds plunge sharply last week due to investor concerns over its debt financing (link).

As tech companies raise large amounts of capital from private credit investors, banks, and bond markets to fund rapid expansion, spending in the artificial intelligence infrastructure sector is making global investors uneasy, with growing doubts about the returns on these investments.

The Wall Street brokerage said that while major U.S. investment banks and Japan's Mitsubishi UFJ Financial Group (MUFG) 8306.T might each have potential CoreWeave exposures between $1 billion and $3 billion, most European and Asian participants’ exposures are less than $500 million.

JPMorgan stated that most of this is through delayed draw term loans (link), which are primarily held through special purpose vehicles, with funds released as project milestones are reached.

“From the perspective of the financing banks, we believe the banks have managed their exposure to CoreWeave appropriately, with very robust collateral,” said JPMorgan’s team of analysts led by Kian Abouhossein in a report.

The brokerage added that because banks provide limited disclosure of their exposure in the AI investment cycle, the estimations are based on “simplified assumptions.”

JPMorgan gave CoreWeave an "Overweight" rating and set a target price of $125 by the end of 2027.

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According to the brokerage, this cloud computing company has about $24 billion in committed delayed draw term loans, including $15 billion already drawn and $9 billion undrawn.

CoreWeave, which focuses on providing high-performance computing infrastructure for artificial intelligence, has signed contracts worth tens of billions of dollars with several major technology companies (link). The company’s total debt is about $50 billion.

Last week, the yield on CoreWeave’s 2031 bond (link) US21873SAG30=TE touched nearly 16%, while the cost of credit default swaps (CDS) on the company’s debt rose to about 1,000 basis points.

JPMorgan pointed out that the main risk faced by banks is the mismatch between the upfront expenditure on AI infrastructure and long-term revenue, adding that CoreWeave’s free cash flow is expected to remain negative until 2030.

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