Banks Move to Offload $38 Billion in AI Data Center Debt

Banks Seek to Transfer AI Lending Risk

JPMorgan, Morgan Stanley, SMBC and MUFG are exploring significant risk transfers on AI data center loans they recently underwrote, according to a Financial Times report. These deals allow banks to keep loans on paper while shifting the riskiest slice to outside investors.

The shift comes just six months after banks were racing to fund data center construction tied to Oracle, Meta and the rest of the AI buildout. Lenders are now bumping up against internal limits on how much AI-linked exposure any one institution can hold.

One case illustrates how stuck this has gotten. A group including JPMorgan and MUFG has spent more than six months trying to distribute $38 billion in construction debt for a Texas and Wisconsin data center project leased to Oracle, Bloomberg reported. Some lenders are now willing to sell pieces of it to non-bank buyers at a discount, just to move it.

Matthew Moniot, co-head of credit risk sharing at Man Group, told the Financial Times the deal sizes are "out of scale to anything we've thought about, ever."

Oracle's Credit Position Deteriorates

Oracle's five-year credit default swaps climbed to around 151 basis points in early October, levels last seen in 2009, according to market data cited by Bloomberg. S&P cut Oracle's rating to BBB-, a single notch above junk, back in July.

The company is targeting more than $40 billion in additional debt and equity this fiscal year, on top of the $18 billion in bonds it sold in a single day last September. The money is needed to keep funding its Texas, Wisconsin and New Mexico sites.

Oracle has also sued Wisconsin's Public Service Commission over a rule that could force it to post more than $7 billion in collateral for its Port Washington data center campus, a dispute that helped push the S&P downgrade as AI spending outpaces cash flow.

Demand for AI Corporate Debt Thins

Bonds from Alphabet, Amazon, Meta, Microsoft and Oracle now trade at a premium to similarly rated non-AI corporate debt. Order books for their offerings shrank from roughly five times the amount on sale in February to under two times by July, Bloomberg reported, the difference between a bond that sells itself and one a bank has to work to place.

The broader rate backdrop has tightened as well. The 10-year Treasury yield hit 5.304% this month, its highest since 2002, after a $39 billion auction cleared at 5.30%, the highest auction yield since 2000. The Federal Reserve's September meeting minutes named AI-related corporate borrowing as a contributor to that move, though Capital Economics argues the bigger driver is inflation and government deficits.

Capital Rotates Toward Stronger Credits

Oracle, Meta, xAI and CoreWeave have used special purpose vehicles to keep AI infrastructure debt off their own balance sheets, but the risk is now turning up at the banks that financed the SPVs in the first place. Investors are rotating toward data centers leased to investment-grade hyperscalers like Microsoft and Google, and away from weaker credits.

CoreWeave-leased paper prices at 7.00% to 9.875%, compared with 5.70% to 7.875% for hyperscaler-leased bonds, according to bond market data compiled by CCIR. Smaller, less capitalized AI infrastructure companies now compete for the same nervous pool of lenders without Oracle's balance sheet or its existing customer base to point to.

The AI boom still runs on the assumption that credit stays open indefinitely at reasonable terms. Six months of banks struggling to sell $38 billion in loans is the clearest evidence yet that this assumption is being tested in real time.

Sources: startupfortune.com