A couple of thoughts that come at this question from a different vantage point ...
1. I agree that the risk positions of the participants is very different. I dont attach that much value to the circular nature of the hyperscaler's tenant + landlord position though. Contra the likes of OpenAI + Claude, they (MSFT, AFW, GOOG ... somewhat ORCL) are being allowed to build infrastructure ahead of clear, certain utility. If LLMs tank, OpenAI dies BUT the plumbing providers will have developed real estate that has a high likelihood of being put to effective use over time. In effect its a reasonable bet with a long term payoff and a hiccup in a few years. If LLMs fly then their investment was justified and the returns are robust without a hiccup. ORCL doesnt have a hook into LLMs (to our knowledge) but that may perversely position them better than the others to take advantage of an LLM flop ?!?! Who pays for all of this ... well .... prices for the space and the power are high -- so for now it washes its face ... later ? If we have the hiccup, then i suspect shareholders across the board --- some get wiped (OpenAI) others get spanked (MSFT etc.). Of course if you have advanced cash into the funding washing machine anywhere other than super senior then OOPS !! Why the jump in CDS ? Simply put, maybe the perception of risk just changed ? It could be that if ORCL did nothing, the CDS would have widened further as the market got to grips with the consequences of MISSING OUT.
2. Corporates are smart (sometimes). CDS purchase makes lots of sense in the context of long term risk. BUT its insurance, and the premium impacts current numbers. To do this at a scale that matters means your next quarterly will disappoint and you get punished .....
In this case is the reason the credit spreads on the cash bonds have widened so much as well is because their debt complex is big/liquid enough for arbitrage vs the CDS or just large enough liquid enough that the bonds can also be shorted? Obviously some of it is increased credit risk so really just asking how you think about the users of CDS vs cash bonds I suppose...thanks!
Such a great write-up. Thank you for sharing!
very interesting! Pretty cheap way to hedge AI mania. what are the writers of CDS thinking?
A couple of thoughts that come at this question from a different vantage point ...
1. I agree that the risk positions of the participants is very different. I dont attach that much value to the circular nature of the hyperscaler's tenant + landlord position though. Contra the likes of OpenAI + Claude, they (MSFT, AFW, GOOG ... somewhat ORCL) are being allowed to build infrastructure ahead of clear, certain utility. If LLMs tank, OpenAI dies BUT the plumbing providers will have developed real estate that has a high likelihood of being put to effective use over time. In effect its a reasonable bet with a long term payoff and a hiccup in a few years. If LLMs fly then their investment was justified and the returns are robust without a hiccup. ORCL doesnt have a hook into LLMs (to our knowledge) but that may perversely position them better than the others to take advantage of an LLM flop ?!?! Who pays for all of this ... well .... prices for the space and the power are high -- so for now it washes its face ... later ? If we have the hiccup, then i suspect shareholders across the board --- some get wiped (OpenAI) others get spanked (MSFT etc.). Of course if you have advanced cash into the funding washing machine anywhere other than super senior then OOPS !! Why the jump in CDS ? Simply put, maybe the perception of risk just changed ? It could be that if ORCL did nothing, the CDS would have widened further as the market got to grips with the consequences of MISSING OUT.
2. Corporates are smart (sometimes). CDS purchase makes lots of sense in the context of long term risk. BUT its insurance, and the premium impacts current numbers. To do this at a scale that matters means your next quarterly will disappoint and you get punished .....
Great read!
In this case is the reason the credit spreads on the cash bonds have widened so much as well is because their debt complex is big/liquid enough for arbitrage vs the CDS or just large enough liquid enough that the bonds can also be shorted? Obviously some of it is increased credit risk so really just asking how you think about the users of CDS vs cash bonds I suppose...thanks!