Liz’s view
One job in finance is to take something risky and make it less risky. It’s called “credit enhancement,” and it’s akin to getting your parents to cosign the lease on your first apartment. In the debt world, it artificially upgrades your creditworthiness: Fannie Mae guarantees mortgages, so banks are more willing to lend. Small charter schools in Boston use the state’s economic-development agency to issue bonds more cheaply. These blue-chip benefactors serve as wrappers, lending AAA ratings to grease the lending gears.
In the AI era, the wrapper is Big Tech. The belief that companies like Google and Microsoft are both too big to fail and too committed to the AI buildout to walk away is the halo that’s shining up bets that would otherwise be too risky to take.
Consider the $200 billion that Anthropic plans to spend buying chips from Google and Broadcom. Anthropic needs to borrow to afford those chips, but it’s unprofitable and privately held (for now). It has no credit rating to lean on. Enter A-rated Broadcom, which is standing behind much of the $36 billion in loans being arranged by Apollo and Blackstone for the purchase.
How much does the wrapper matter? The $31 billion in Anthropic debt that Broadcom is backstopping will pay interest of 4.75-5%, close to Broadcom’s own borrowing costs, a person familiar with the matter said. The remaining $4.6 billion, resting on Anthropic’s creditworthiness alone, is being discussed in the 8.75-9% range.
Anthropic is one of the most important companies in the world right now, but this deal shows it still needs a chaperone to enter the credit markets. Put another way, its parents need to cosign its lease.
Google has similarly backstopped debt for two bitcoin miners-turned-AI infrastructure companies. Without its support, TeraWulf and Cipher would be raising money somewhere in the junk-bond wilderness, if they could raise at all.
Like all financial engineering, this is fine — to a point. But it’s worth remembering that blue-chip benefactors can be dragged fatally down by their dependents. Bond insurers Ambac and MBIA served as the AAA-rated wrapper for more than $1 trillion of debt in the run-up to the 2008 financial crisis. When losses mounted and the bond insurers were downgraded, so was every bond they insured, fueling the meltdown. General Electric was nearly felled the same year by its captive finance arm, which borrowed cheaply against its industrial parent’s rating.
And those benefactors could withdraw their support, too (within the bounds of their contracts, but good luck suing them). That would leave lenders on the hook.
I’m not saying any of that will happen here. But the line between credit enhancing and credit laundering is one to watch. We’ve seen what happens before when risky assets go into Wall Street’s machine and come out stamped AAA on the other side.
Notable
- AI companies have accounted for half of all investment-grade bonds issued this year, according to The Kobeissi Letter, a commentary shop for capital markets.