Banks, investors grow wary of AI debt, spooked by market selloff

NEW YORK, Nov 9 (Reuters) - Banks and credit investors are upping their scrutiny of AI-related debt deals while showing reluctance to increase exposure to borrowers, jolted by the recent market selloff and changing sentiment toward the technology's growth trajectory.

Some banks, which ​just a few weeks ago were lining up to fund AI deals, are now telling market participants they would be reluctant to finance additional deals even when they involve guarantees ‌from the sector's marquee technology companies, according to several banking and credit sources.

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The lending pullback has been exacerbated by a recent drop in the stock market, which erased $2.5 trillion in market value on Thursday from the Nasdaq 100, and sent the index into a correction. The US midterm election results are also adding anxiety about more oversight of data centers.

A potential slowdown in AI data center construction could curb loan growth and dent investment banking fees from the loans, bond sales and stock offerings that have helped finance the sector's ​rapid expansion.

Anthropic declined to comment on its recent borrowing. Google declined to comment.

"Over the past year there was unbridled enthusiasm to ⁠provide debt to neoclouds, anyone who was building data centers or some sort of AI asset," said Chris Poggi, finance partner at Ropes & Gray, referring to companies that rent out powerful AI computing capacity, often built around ​advanced chips, to businesses developing AI.

"Debt investors' books have become full and now they are assessing if they have extended themselves as much as they're going to extend themselves this year."

Even so, much more supply is coming to ​the AI loan market because borrowing needs are so high. Goldman Sachs Research projects global hyperscaler debt issuance will reach $420 billion in 2027, more than 60% above its estimate of $250 billion for fiscal 2026.

Investors and lenders are also stress-testing cash flows for economic downturns and scrutinizing contractual details underpinning AI infrastructure projects, including service obligations, operational deadlines and the conditions under which large technology customers could reduce or terminate commitments, two of the sources said.

Many of these deals are fairly complex. Chipmakers typically backstop the senior ​debt that will finance the purchase of advanced chips for an AI company and also guarantee payments on the long-term lease of the data centers. Banks and private credit players have until recently been attracted to such ​loans because of the guarantees that ensure debt payments.

As hyperscalers and neoclouds race to raise additional debt for data centers, chips and computing infrastructure, they are increasingly running into lenders questioning how much additional exposure they want to a sector that ‌is already ⁠taking up a large part of their loan book.

At JPMorgan Chase, for instance, loans backed by other income-producing properties, which includes data centers, were at $29 billion outstanding at the end of the third quarter. They are the bank's second-largest commercial real estate exposure at 12%, following apartment buildings. JPMorgan declined to comment.

That was up from 8% of the bank's CRE loans three years ago, when the data center category ranked fourth after apartments, industrial properties and office buildings.

In Asia, some banks are making sure deals are backed by cash flow and scrutinizing risks closely.

WEAKER CREDIT

The pullback has been particularly pronounced among riskier AI borrowers such as ​neocloud companies and standalone data ⁠center operators.

Some planned bond offerings linked to data centers and chips are also being shelved.

Nebius in October entered into a $3.5 billion ​senior secured loan facility provided by Citigroup, to use for data center development and GPU procurement and general corporate purposes.

"Most banks and credit investors will take a wait and see approach," said Jay Bala, co-founder and CEO of $300-million alternative asset manager AIP, referring to how AI ​growth will fare following the Democratic sweep of Congress in the midterms.

Reporting by Saeed Azhar and Nupur Anand; additional reporting by Suzanne McGee, Tatiana Bautzer and Rae Wee in Singapore; Editing by Stephen Gandel, Megan Davies and Nia Williams

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Saeed Azhar is a Reuters financial journalist and part of the U.S. banking team, which covers Wall Street's biggest banks. He focuses on Goldman Sachs and Bank of America, and also writes about regional banks. Before moving to New York in July 2022, he led the finance team in the Middle East from Dubai, and also worked in Singapore, covering Southeast Asia finance.

Nupur Anand is a U.S. banking correspondent at Reuters in New York. She focuses on JPMorgan Chase, Wells Fargo and regional banks. Anand covered banking and finance in India for more than a decade, chronicling the collapse of major lenders and turmoil at digital banks and cryptocurrencies. She has a degree in English literature from Delhi University and a postgraduate diploma in journalism from the Indian Institute of Journalism & New Media in Bangalore. Anand is also an award-winning fiction writer.