An AI label is no longer enough to secure credit. According to J.P. Morgan, lenders now require companies to prove they can fund their investments, service their debt and convert spending into cash flow. Insurance costs against default have climbed to unusual levels, a signal that deserves careful reading.
🔑 Key takeaways
- J.P. Morgan says the AI label no longer reassures lenders, who now assess repayment capacity.
- The five-year CDS of a heavily indebted AI infrastructure company has reached 1,100 basis points.
- Weekly CDS volumes on major tech names exceeded $9 billion in September, versus under $2 billion in July.
- Large AI companies with solid cash flows pay between 50 and 120 basis points for protection.
A Tougher Screen for Borrowers
After a period of intense demand for capital tied to artificial intelligence, the credit market is starting to separate borrowers. In a note published on October 23, Justin Biemann, global investment strategist at J.P. Morgan Private Bank, summed up the new requirement: belonging to the sector is no longer enough to reassure creditors.
“The AI label alone is no longer enough to reassure lenders. Companies need to show they can finance the investment, repay their debt and, over time, turn their spending into cash flow.”
Justin Biemann, Global Investment Strategist, J.P. Morgan Private Bank
Elon Musk issued a similar warning the Sunday before the analysis was published. He pointed to tightening debt financing for “neocloud” AI firms, companies whose revenue depends almost entirely on data centers. That profile is especially exposed: these firms must fund heavy capital spending long before recurring revenue arrives.
Credit Default Swaps as a Risk Barometer
A credit default swap (CDS) works like insurance against a bond issuer failing to pay. The buyer pays an annual premium and receives a substantial payout if the borrower defaults or can no longer meet its obligations. That premium, known as the spread, is quoted in basis points (bps). At 100 bps, protecting $10 million of debt costs $100,000 a year. The wider the spread, the more investors demand to bear the risk.
Volumes Surge
According to Morgan Stanley, weekly CDS volumes linked to bonds issued by Oracle, SpaceX, Alphabet, Amazon, Meta, Broadcom and Nvidia averaged more than $9 billion in September, up from less than $2 billion a week in July. A more than fourfold increase in two months suggests hedging has become routine.
| Indicator | July | September |
|---|---|---|
| Average weekly CDS volume | Under $2 bn | Over $9 bn |
Record Spread Levels
The cost of insuring debt issued by several AI-linked companies has reached historic highs. Biemann illustrated the point with an unnamed AI infrastructure company that has piled up tens of billions of dollars in loans and other obligations.
| Profile | Five-year CDS spread | Annual cost for $10M of debt |
|---|---|---|
| Large AI companies with solid cash flow | 50 to 120 bps | $50,000 to $120,000 |
| Established infrastructure borrowers | Near 300 bps | About $300,000 |
| Heavily indebted AI infrastructure company | 1,100 bps | More than $1,000,000 |
Biemann’s message on the trajectory of these issuers is direct:
“Pricing levels of this kind imply a probability of default close to or above 50% over five years, compared with less than 30% a year earlier.”
Justin Biemann, Global Investment Strategist, J.P. Morgan Private Bank
Lehman Brothers, With Caveats
Biemann notes that CDS can act as an early warning signal. Lehman Brothers‘ CDS traded below 100 bps in the third quarter of 2007, then rose above 1,400 bps in mid-September 2008. The bank filed for bankruptcy a few weeks later, triggering a global market crisis.
| Date | CDS spread | Event |
|---|---|---|
| Q3 2007 | Below 100 bps | Starting level |
| Mid-September 2008 | Above 1,400 bps | Peak before collapse |
| A few weeks later | – | Bankruptcy filing |
Biemann qualifies the comparison, however. In his view, today’s CDS levels should be read as “traffic lights rather than countdown clocks.” Nothing suggests the companies concerned are destined for a Lehman outcome. Activity in CDS on large groups with strong cash flow looks more like portfolio insurance than a bet on crisis.
Equities and Crypto: A Contagion Risk
The Nasdaq fell 6.7%, from 31,360 points on October 6 to 29,263 points at the time of the report. Nvidia and Oracle declined more than the index, a sign that investors are questioning whether AI promises will show up on balance sheets.
AI remains a powerful narrative driving risk appetite, crypto included. Bitcoin and Nvidia both bottomed within weeks of ChatGPT’s debut in late 2022 and have rallied significantly since. A destabilization of the AI sector could therefore spill over into bitcoin and other risk assets. However, the sources do not document any bitcoin decline tied to these warnings: this is a potential risk, not an observed effect.
Conclusion: A Signal to Watch
J.P. Morgan’s note describes a shift in the credit regime: access to financing now depends on the ability to fund, repay and monetize massive investment. A 1,100 bps spread on an indebted infrastructure company contrasts sharply with the 50 to 120 bps paid by strong players, underlining wide dispersion among issuers.
Three scenarios remain open. In the first, cash flows materialize and premiums drift back toward earlier levels. In the second, portfolio hedging remains the norm without credit deterioration. In the third, rising defaults would confirm the fears and weigh on risk assets, bitcoin included. The indicators to watch are CDS spreads, trading volumes and refinancing conditions for the most indebted companies.
Sources
- CoinDesk, report on J.P. Morgan’s note (October)
- J.P. Morgan Private Bank, note by Justin Biemann published October 23
- Morgan Stanley, data on CDS volumes linked to technology-sector bonds (September)
This article is published for informational and educational purposes only. It does not constitute investment advice. Do your own research (DYOR) before making any decision.
