Mounting debt fuels AI data centre boom, raising fears of financial strain

By Cade Metz 

For years, the tech industry’s giants, which make tens of billions of dollars in annual profits, usually built new data centers with their own money. Just last year, Google expanded an already massive computing facility in Oklahoma, while Amazon went to work on a new data center in Indiana that will eventually use enough electricity to power over a million homes. 

But a new set of free spenders is emerging in the gallop toward bigger and bigger artificial intelligence projects. Smaller outfits — far from household names, not nearly as wealthy but eager to get in on the AI boom — have started to build their own giant data centers. And they are borrowing tens of billions of dollars to do it. 

 

In September, Meta agreed to buy $14.3 billion in computing power from CoreWeave, a New Jersey company that went public this year. CoreWeave has told financial analysts that for every $5 billion in computing power it plans to sell to customers over the next four years through new data centers, it must borrow $2.85 billion. 

The same month, Microsoft made a similar deal with Nebius, a start-up based in Amsterdam, for $19.4 billion. To help build its data centers, Nebius recently sold $3.16 billion in what are called convertible notes, which can be converted into company shares years down the road but begin as debt. 

Now, there are growing concerns that these smaller companies are shouldering risks they may not be able to handle, entwining themselves in relationships that financial analysts say are worryingly opaque. So are a handful of much larger companies that are working with OpenAI, the San Francisco company that launched the AI boom with its ChatGPT chatbot three years ago. 

The debt used to fund data centers could exceed $1 trillion by 2028, or more than a third of all dollars spent on these facilities, according to analysts at Morgan Stanley. If AI technologies do not pull in as much revenue as expected over the next several years, the debt-laden companies could be left holding the bag for the rest of the industry. 

The shift to debt financing is reminiscent of the dot-com boom in the late 1990s, when many companies racked up debt as they raced to lay the fiber-optic cables that would become today’s high-speed internet. When the bubble burst, companies like WorldCom, Global Crossing and Lucent went bankrupt or had to sell themselves to larger rivals. 

Contributing to this mounting pile of debt are projects led by OpenAI. Even though the company is pulling in billions of dollars in annual revenue, its chief executive, Sam Altman, has said it will not be profitable until 2029. 

Oracle said it would take on an additional $18 billion in debt. Analysts at KeyBanc Capital Markets estimate that Oracle will have to borrow $25 billion a year over the next four years to build these facilities. 

And in some cases, Oracle is paying for only part of the data center. At OpenAI’s first data center in Abilene, Texas, Oracle is paying for the computer hardware inside, while a company called Crusoe is responsible for erecting the building, the cooling equipment and other infrastructure. 

For its part of the project, Crusoe borrowed $15 billion through a partnership involving Blue Owl Capital, a private credit lender that is helping to fund several data centers across the country and will own the one in Abilene. 

OpenAI has also agreed to buy computer chips from those companies as it builds its data centers. 

If OpenAI does not need those chips, Nvidia and AMD can pull out of the deals, but OpenAI and others could still be on the hook for the debt they have taken on. 

“The risk is that companies will buy a bunch of computer chips for AI and they won’t have the revenues to pay for them,” said Andrew Odlyzko, a mathematician and historian who specialises in the technological manias of the recent and distant past. 

As companies borrow money to build data centers, their collateral is sometimes the computer chips they will install in these giant facilities; if the companies default on their loans, their lenders own the chips. But computer chips, like cars, are worth less over time. 

The risks could extend beyond the tech industry, financial experts say. 

The data center debt is held by a wide array of financial institutions, including traditional banks, private credit lenders like Blue Owl and Ares Management, and the many companies that are funding new computing facilities. 

“Who is holding all this debt? It is not like it is just being held by big banks. It is all over the place,” said Paul Kedrosky, a research fellow at MIT’s Institute for the Digital Economy who has closely tracked spending on new data centers for AI. 

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