AI infrastructure debt and leverage draw market scrutiny

As Nvidia partners with Wall Street firms to mobilize more than $500 billion of third-party capital for AI infrastructure, the increasingly complex financing underpinning the boom is coming under closer scrutiny.

Hyperscalers and their financial backers are turning to bond markets, joint ventures, leases and other structures to fund an unprecedented infrastructure buildout. At the same time, leverage is increasing investors’ AI exposure, as hedge funds and other investors use prime brokerage borrowing and derivatives to amplify returns on their bets on the boom.

But the unravelling of AI-focused hedge fund Situational Awareness, after losses on its leveraged equity bets, is heightening concerns over how much is being borrowed, where it sits, how visible it is, and how quickly it could unwind, as market watchers debate whether revenues justify the scale of spending.

Nvidia’s plan to develop platforms for AI infrastructure in partnership with Apollo, Blackstone, BlackRock, Brookfield, KKR and Goldman Sachs could involve private asset-like structures and asset-based financing. Nvidia CEO Jensen Huang told CNBC Monday that Nvidia’s chips are now an “investable infrastructure asset.”

Some tech giants are using joint ventures and other leasing vehicles to borrow money for AI data center spending — without the debt appearing on their balance sheets until the leases begin.

Goldman Sachs analysts estimated that hyperscalers have combined lease commitments for data centers, R&D facilities, offices and equipment of $1.5 trillion, up from about $200 billion five years ago. This includes about $1 trillion of “uncommenced” lease commitments, which are not yet shown in financial statements but will result in future payments.

This “can understate leverage and future liquidity needs as these obligations are eventually recognized and contractual payments come due,” Goldman analysts said in the Aug. 6 note.

This surge in debt issuance — including less-visible forms of leverage — is sharpening the focus on whether the eventual returns from AI infrastructure can justify the vast sums being spent.

Lotfi Karoui, multi-asset credit strategist at PIMCO, said the AI capex cycle is, adjusted for inflation, on track to be the largest investment cycle since the 19th-century railway construction.

But the ultimate scale of the buildout remains “deeply uncertain,” he said in PIMCO commentary dated Aug. 11, highlighting consensus forecasts that hyperscaler capital spending alone will surpass $1 trillion per year from 2027 onward, “with no clear signs of moderation.”

Karoui said that the scale of hyperscalers’ borrowing is such that they are diversifying their debt issuance beyond dollar-denominated paper, with issuers tapping euro, sterling, yen, Swiss franc and Canadian dollar markets.

He added that the relative outperformance of euro-denominated bond spreads issued by Amazon and Alphabet,…