John Lloyd, global head of multi-sector and corporate credit at Janus Henderson, maintains a position in CoreWeave 9.75% bonds due in 2031 despite the issuer's credit distress. The yield to maturity on this debt has surged to 15.97%, a jump of more than 70% since issuance in April, as bond prices have fallen sharply.
Lloyd holds these bonds in the firm's Multi-Sector Income Fund. He attributes the recent sell-off to market overreaction, noting that while spreads have widened and yields have risen, he does not see a fundamental change in the ecosystem that warrants such a move. He argues that CoreWeave can manage its higher cost of financing through creative methods rather than facing a structural failure.
CoreWeave has accumulated significant debt to fund its data center buildout, with total debt reaching approximately $51.6 billion. This includes about $35 billion in notes, bonds, and loans. The market's nervousness is reflected in the company's five-year credit default swaps, which stand at nearly 1,081 basis points, a level generally indicative of credit distress. The spread is up 13% week over week, although it was lower earlier in the session.
The pressure on CoreWeave's valuation is driven by rising Treasury rates, which increase funding costs for companies with refinance risk. The company's leverage has increased substantially, with a debt-to-equity ratio of 702%, up from 290% a year ago. Consensus estimates project that CoreWeave will spend $36.4 billion on capital expenditures this year against an Ebitda of $7.5 billion. While revenue and Ebitda are expected to grow to $26.5 billion and $16.7 billion respectively next year, capital expenditures are forecast to reach $47.9 billion, suggesting a continued need for external financing.
Lloyd believes CoreWeave can bridge this gap without relying heavily on the high-yield market. He points to potential operating free-cash flow generation next year as a support for capital expenditure needs. Additionally, the company could utilize GPU financing by borrowing against graphics processing units or rental contracts. Lloyd also suggests that CoreWeave could request increased prepayments from major customers such as Microsoft, Meta Platforms, and OpenAI.
The neocloud operator faces no near-term maturities, meaning it is not currently exposed to immediate refinancing risk. Lloyd notes that the supply and demand dynamics for AI compute remain tight, with adoption rates exceeding consensus demand curves and a supply bottleneck in chips and memory. He describes CoreWeave as one of the best-in-class operators for getting data centers up and running, citing improving financials throughout the year.
Market sentiment could shift if frontier AI labs proceed with initial public offerings. Lloyd expects Anthropic to go public in November, potentially followed by OpenAI. Successful IPOs from these companies could provide data points that reassure investors about the sustainability of AI demand, thereby supporting neocloud operators like CoreWeave.
Despite his bullish stance on the business model, Lloyd acknowledges that the path to recovery will not be linear. He expects the bonds to recover but warns that the process will involve bumps along the way as the company navigates higher market rates and financing challenges.