CRWV High-Yield Bonds Face Distress Levels Amid Stock's Sharp Selloff

SPEAKER_1 (0:00)

We're back on Morning Trade Live. Let's focus on the one-day chart for CoreWeave, the stock down again after plunging more than 15% yesterday. We're trading down 7.5%, so extending on the losses here. We have come well off the highs. We're at a new 52-week low today. There have been a spike in yields. We've got new debt concerns here. We've got Michael Intrader, the CEO, pushing back on some of this now. So that is the focus of the Morning Trade. For a closer look is Alex Coffey. This one, Alex has very much got the market on edge. I mean, obviously, as far as the credit fears are concerned. Just walk us through the latest, what we know here.

Alex Coffey (0:37)

Yeah, as you mentioned, CoreWeave is under pressure again today. It's down, you know, 7%, 8% here in early trading. This is investors digest growing concerns around the company's debt load. Sam Bloomberg reported that the cost of insuring CoreWeave's debt against default surged to a record high. Credit markets now, at least at the time of the publish of that article that I was reading, more than a 60% chance of default over the next five years. Meanwhile, the company's high-yield bonds have fallen deeper into distress territory, with some yields climbing above 15%.

Now, this sell-off follows comments from the company's co-founder, Brandon McBee, to the Financial Times, where he said that CoreWeave's long-term goal is to try to achieve an investment-grade rating and access much larger pools of capital to fund its AI buildout. I should also note, though, even with this pullback of, you know, in real time, about 7%, not everyone on Wall Street is turning bearish.

Deutsche Bank, for example, called the recent sell-off a buying opportunity. It maintains its buy rating and $150 price target. They argue that CoreWeave's customer base, its execution and the AI infrastructure demand remain intact despite the credit market volatility. Nonetheless, though, you do see the ripples across not only the NeoCloud space, but you could make the case that this is the kind of culprit for this giant AI infrastructure sell-off that we've experienced over the last 24 to 48 hours.

SPEAKER_1 (2:15)

Yeah, the bottlenecks have been getting absolutely punished. Obviously, the memory companies as well, the chip names too. I mean, software has been spared. So, I mean, it's pretty bifurcated across tech. But to your point, it is sending fears through the rest of the market here. Another culprit added to obviously the Chinese competition fears and some of the high-profile warnings we've heard this week. Alex, really appreciate it. Thanks so much for the breakdown of this particular story. Let's trade CoreWeave now with Joe Tigay, Portfolio Manager of the Rational Equity Armour Fund. Good morning, Joe.

You know, really interesting story here is to, I guess, what it is telling us about the cost of capital and the amount of money that these companies are having to get their hands on to build out this entire AI infrastructure. Just walk us through your thoughts on an example trade on this one.

Joe Tigay (3:06)

Yeah, this is a really important thing to be watching for investors. I mean, the AI trade is so important to the whole rally and the whole market. There's a lot of uncertainty in the AI trade. You're kind of looking under the surface like where is the most uncertainty? And for me, it's a couple of companies that aren't even public. A couple of private companies are the most important companies to me. I'm watching OpenAI and Anthropic. We don't really know exactly their financing, exactly how much revenue they're making. And they've made a lot of promises in the AI space.

In the infrastructure space, there's a lot of obligations tied to their future spending. And it's going to be filtering on through the whole system. Now, critics of OpenAI and Anthropic will say, hey, they're not really making as much money as we think that they are. People aren't going to want to be tokenizing anymore. Where is their moat? And there's some concerns that they're not going to be able to live up to their promises. And if they don't spend the money that they're promising, it's going to be hitting the whole ecosystem. And so companies will be looking around, who in the ecosystem has a lot of debt, who is going to have a hard time to pay it. And really what we saw is just the debt market kind of be breaking the stock in the short term here. Now, that said, there's the other side of the trade. There's people that are out there saying, hey, this is absolutely going to be coming true. I'm willing to be spending, to be taking this risk on this debt. I'm willing to be buying this stock here. We saw maybe CoreWeave a little bit higher off of their lows. And we've seen this narrative come in time and again for this AI trade. People talking about, you mentioned China chip, people talking about China models, people have been fading the AI trade on and again for the past three years. And every time it's been an enormous buying opportunity, I don't know for certain if this is going to be the same this time around, but it seems like they were wrong. People fading the AI trade have been wrong every time so far. At some point, they might be right, but there's no guarantee that this time they are right.