We have long said that the credit default swap market is the early warning sign of deterioration. The reason is that it shifts daily in response to information. Now we have the events surrounding CoreWeave.
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MacroStrategy published this piece on CoreWeave this morning. With their full permission, for which we are grateful, Michael Wilson has allowed us to send it out as a quick note. Their analysis this morning about CoreWeave, its debt, and the credit default swap issue is reproduced below.
CoreWeave frightened investors yesterday by saying it would like an investment grade rating to gain the privilege of borrowing “unlimited” pools of money. Its shares fell as much as 17% and its 2032 debt traded at less than 78 cents, yielding 15%, which investors bought at par 4 months ago. Credit Default Swaps priced in a more than 50% chance of default within the next 5 years. “They’ve run out of the ability to borrow even at 9% – that’s a very concerning factor”, DA Davidson said. “If CoreWeave is borrowing at 9% and the best return they can get off of that is a 5% return, it doesn’t matter how much they scale: they’re destroying value at every turn”. “That’s especially true for the type of neocloud that funds their entire investment based on debt. The more leverage we use to build data centres, the more risk we’re bringing into the system”. CEO Michael Intrator, in an internal mail, said the company’s financial position “more than supports” its debt obligations. “When you are building a new type of technology company there will be periods of time when the market misunderstands and acts irrationally”. “We are confident in our business model, our customers, the extraordinary quality of our execution, and the relentless discipline around the financial engine we have built”.
Read the entire MacroStrategy Partners Daily News – October 15 note where we extracted this excerpt here:
TheMacroStrategyPartnership’s Substack
MacroStrategy Partners Daily News – October 15
14 days ago · TheMacroStrategyPartnership
https://themacrostrategypartnership.substack.com/p/macrostrategy-partners-daily-news-7dd
Again, we thank Michael Wilson and MacroStrategy for permission to share this with our readers.
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