[CoreWeave, AI Crisis Trigger ②] CDS Time Bomb? The Hidden Risks of AI Debt

CoreWeave, Unmanageable Debt?

Surge in CDS Premiums

CDS is a warning signal from Wall Street

[Block Media Reporter Lee Jeong-hwa] The credit default swap (CDS) premium for CoreWeave, an artificial intelligence (AI) infrastructure company, has soared to an all-time high, reviving memories of the 2008 global financial crisis. At that time, complex credit derivatives based on real estate loans amplified the risks for financial institutions, exacerbating the crisis. This time, the surge in borrowing for AI data center construction and the surrounding credit derivatives market have emerged as new sources of anxiety.

Bloomberg reported on the 16th (local time) that CoreWeave's CDS premium has surged, leading the market to assess the probability of the company defaulting within the next five years at over 60%. Not only CoreWeave, but also the CDS premiums of major tech companies such as Microsoft, NVIDIA, Meta, and Amazon have significantly risen since the fall of 2025. Some companies have seen their premiums double.

The rise in CDS premiums is different from a simple drop in stock prices. While the stock market evaluates a company's growth potential and profits, the CDS market reflects whether a company can properly repay the money it has borrowed in its pricing.

This is particularly noteworthy for companies like CoreWeave that rely on large-scale borrowing, as a surge in CDS can lead to a funding crisis.

What is CDS... A Derivative Product Like Insurance Against Corporate Default

CDS stands for Credit Default Swap. It is a credit derivative that transfers the risk of a company or country failing to repay its debt to other investors. CDS operates similarly to insurance. For example, suppose a bank lends $100 million to an AI data center company. The bank bears the risk of not being able to recover the loan if the company goes bankrupt.

In this case, the bank can purchase a CDS from another financial institution or hedge fund. It is akin to taking out insurance. The bank pays a premium similar to an insurance fee to the CDS seller regularly. In return, if a credit event such as bankruptcy or default occurs during the contract period, the bank receives compensation from the CDS seller for the amount of the loss. This is similar to receiving an insurance payout when an accident occurs.

The typical maturity of a corporate CDS contract is five years. CDS premiums are usually expressed in basis points (bp). One bp is 0.01 percentage points.

For instance, if the CDS premium for a $100 million debt is 500 bp, the annual premium corresponds to 5% of the nominal principal, which is $5 million. If the premium rises to 1000 bp, the annual cost increases to $10 million. This means the lending bank pays an insurance premium of $5 million or $10 million annually in case it cannot recover the loan.

In practice, CDS is traded reflecting standardized periodic payment premiums (interest), upfront payments, contract maturities, and market prices.

If the borrowing company goes bankrupt and the recovery rate for the bonds is determined to be 40%, the bank will receive a loss corresponding to 60%, which in this case would be about $60 million from the CDS seller. The bank does not incur a loss. Instead, the CDS seller suffers a significant loss.

Importantly, the investor who purchases the CDS does not necessarily have to hold the bonds of the company. While the bank holding the bonds buys a CDS to hedge against losses, Wall Street views CDS itself as an investment target.

Suppose there is a hedge fund that holds shares of the company. If it does not want to sell the shares but wants to reduce risk, it may also purchase a CDS. CDS is a means of diversifying risk.

What the Surge in CDS Means... What is the Market Afraid Of?

An increase in CDS premiums generally indicates that the cost of hedging against the company's default risk has risen. If a company's financial structure deteriorates or interest burdens increase, investors demand higher premiums. The increase in investors seeking to avoid credit risk can also lead to rising CDS premiums.

In the case of CoreWeave, the issue is identified as the massive funds borrowed for data center construction and securing high-performance semiconductors from NVIDIA. According to the Wall Street Journal (WSJ), CoreWeave's total debt reported in its recent quarterly report is $35.6 billion. Additional lease obligations from data center rentals also amount to billions of dollars.

As of June, the credit rating for unsecured bonds is rated B by S&P, which is considered speculative grade. CoreWeave's CDS premium surged to an all-time high during trading on the 15th. The implied probability of default within the next five years reflected in related derivative prices has exceeded 60%.

The estimated default probability in CDS is influenced by assumptions about bond recovery rates, risk premiums, market liquidity, and more. There may be differences from objective predictions regarding the actual likelihood of default. Nevertheless, the surge in CDS premiums signals that the bond market is seriously acknowledging CoreWeave's financial risks.

Especially when CDS premiums rise and bond yields increase, companies may have to bear higher interest rates when issuing new bonds. In this case, the increase in borrowing costs can worsen profitability, creating a vicious cycle where deteriorating profitability further raises borrowing costs.

So how can CDS, designed to diversify risk, amplify risk? What are the thoughts of investors betting on CDS risk, i.e., those on the CDS selling side? Why would they take on such risks when they have to pay out if the company fails?

Wall Street uses CDS as a financial product to bet on a company's credit risk. As these bets accumulate, they further exacerbate the risk. A representative example is the subprime mortgage crisis that became problematic during the 2008 financial crisis. The third part will compare the current situation with that of 2008.

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