AI Debt Risks: Private credit markets in the hot seat

The artificial intelligence boom is attracting colossal investments, and we're not just talking about sci-fi startups. Industry giants, the so-called “hyperscalers” providing cloud services, need infinite computing power. To fund all this, they often turn to private credit, which means loans from specialized funds rather than traditional banks.

This year, in some indexes, 30% of net new private credit issuance is linked to AI, including Nvidia Corp. It almost seems like AI has become the new golden goose of financial markets. But every boom carries a shadow, that of hidden risks.

Facing such massive exposure, concerns in the credit market are starting to surface. This is where Nvidia, the chip giant powering much of this revolution, comes in. They had, let's say, a creative idea to reassure investors.

Nvidia Corp. attempted this week to calm credit markets by offering its computing power as a form of securitization. Essentially, they've turned their server processing capacity into tradable financial securities. It's a bit like turning mortgages into packages to buy and sell. Are we sure this time is different?

Neil Callanan of Bloomberg News warned that systemic risk is not imminent, but it could materialize. Translation: everything's fine for now, but keep an eye on the pot. The main concern revolves around banks' excessive exposure to residual value guarantees on assets.

These guarantees are promises of future value for equipment like the servers hosting AI. If the value of these assets were to plummet, perhaps due to rapid technological obsolescence, banks would be left empty-handed. Or worse, with insurance products linked to these guarantees proving worthless. In short, the same old game with new rules.