Despite CoreWeave’s high bond yields and elevated credit default swaps signaling distress, John Lloyd, global head of multi-sector and corporate credit at Janus Henderson, sees a compelling opportunity. His firm’s Multi-Sector Income Fund holds CoreWeave 9.75% bonds due in 2031, currently yielding nearly 16%, as Lloyd believes the company is “best in class” at deploying and operating data centers vital for the burgeoning AI ecosystem, and can creatively finance its expansion, mitigating immediate refinancing risks.
Amidst market skepticism and deeply distressed debt, John Lloyd, global head of multi-sector and corporate credit at Janus Henderson, is unwavering in his conviction for CoreWeave. He dismisses the recent sell-off in the AI cloud provider's bonds as an "overreaction," firmly believing CoreWeave is poised to overcome its financing hurdles.
Lloyd’s confidence is underscored by the Janus Henderson Multi-Sector Income Fund's significant holding in CoreWeave's 9.75% bonds due in 2031. These bonds are currently yielding an eye-popping nearly 16% — a stark increase of over 70% since their initial issuance in April. Despite the plummeting bond prices and widening spreads, Lloyd sees no fundamental shift in the AI ecosystem that would justify the market’s extreme reaction, beyond the company's increased cost of financing, which he believes CoreWeave can navigate through creative strategies.
CoreWeave's aggressive expansion to build out its data center infrastructure has led to a massive debt load, reportedly totaling around $51.6 billion, with $35 billion in notes, bonds, and loans. This substantial leveraging has naturally made investors uneasy about the company’s ability to finance ongoing operations and growth, especially as its stock has recently tumbled by 20% and its five-year credit default swap spreads spiked to distressing levels above 1,000 basis points.
However, Lloyd categorizes this as a temporary setback, largely driven by the broader market's nervousness regarding rising Treasury rates. Higher rates invariably push up funding costs, particularly for companies perceived to carry refinancing risk, a category CoreWeave currently occupies in the market's eyes.
With a debt-to-equity ratio surging to 702% from 290% a year prior, and projected 2024 capital expenditures of $36.4 billion vastly outweighing an estimated EBITDA of $7.5 billion, the financial picture appears challenging. While analysts predict strong revenue and EBITDA growth for 2025, reaching $26.5 billion and $16.7 billion respectively, capex is also expected to climb to $47.9 billion, suggesting a continued reliance on external financing.
Creative Funding Solutions on the Horizon
Despite these figures, Lloyd remains optimistic about CoreWeave's capacity to fund its capital-intensive data center buildout. He anticipates that in the coming year, the company will generate sufficient operating free-cash flow to cover a portion of its capex needs.
Moreover, CoreWeave possesses several alternative funding mechanisms. These include GPU financing, allowing the company to borrow against its graphics processing units or existing rental contracts. Additionally, it could seek increased prepayments from its key enterprise customers, which include industry giants like Microsoft, Meta Platforms, and OpenAI. Lloyd suggests that these options might even preclude CoreWeave from needing to tap the high-yield market for future financing. Crucially, the company faces no immediate refinancing pressure, as it lacks significant near-term debt maturities.
'Best in Class' in a Booming AI Landscape
The broader market dynamics for AI compute further bolster Lloyd’s conviction. He highlights a tight supply/demand environment within the AI ecosystem, where adoption rates are consistently outpacing consensus demand curves. Coupled with persistent supply bottlenecks for critical components like chips and memory, this creates a highly favorable landscape for CoreWeave.
"All data point to the business model functioning very, very well," Lloyd states, commending CoreWeave as "one of the best-in-class at getting data centers up and actually running them." He also notes the company's improving financials throughout the year. Potential IPOs from leading AI labs such as Anthropic (expected in November) and OpenAI could also serve as significant turning points, soothing market anxieties and validating the robust demand side of the AI sector. While CoreWeave must still convince the market of its ability to navigate higher rates and financing challenges, Lloyd foresees a recovery for its bonds, acknowledging it might not be a "straight line."
— Gina Francolla contributed reporting.
