By Saeed Azhar, Max A. Cherney, Isla Binnie and Stephen Nellis
NEW YORK, Oct 1 (Reuters) – Nvidia’s mammoth financing plan has opened a debate on Wall Street about how much its advanced chips and the infrastructure around them are worth. The answer for banks and investors seems to be: Not as much as Nvidia thinks.
Some lenders want higher guarantees than the company had originally outlined, even for Nvidia’s industry-leading AI processing power, as they try to calculate how long the revenue from its chips will last, banking sources and credit managers told Reuters, some requesting anonymity.
The chips, which provide the critical processing power known as “compute”, are at the center of a potential mismatch in views between Nvidia and a more cautious Wall Street, raising potential future financing headaches for AI companies seeking to tap deep new pools of capital.
The bankers and asset managers said they have some doubts that the chips can act as long-term collateral as Nvidia says, and therefore want more guarantees from the company on its $500-billion financing plan that relies on chip-backed loans.
Already, sources told Reuters, deals in the pipeline likely offer investors more certainty including stronger guarantees.
“Wall Street is much more conservative,” Tony Trzcinka, a senior portfolio manager at Impax Asset Management, said of Nvidia’s claim that its most specialized chips can earn revenues for a decade.
In a statement, an Nvidia spokesperson said that its “AI compute is a productive, durable and fungible asset that can support long-term financing. Our financing partners independently assess each opportunity, including customer commitments, expected cash flow and residual value.”
“Financing structures will vary as this market develops,” the spokesperson added.
QUESTIONS OVER PLAN
The questions over Nvidia’s financing plan come as companies and investors are pouring hundreds of billions of dollars into data centers, chips and power capacity to support the broader AI boom, which is driving US economic growth. That has increased scrutiny of the more complex deals, and assumptions about the longer-term value of computing hardware.
Some have questioned the use of private credit, vendor financing and circular deals, the last two of which played a role during the dot-com boom and bust more than 25 years ago, Morningstar analysts said in a recent note.
Nvidia’s plan, announced with financiers including Blackstone, Apollo and KKR in August, had envisioned using chips as collateral with limited guarantee in order to allow AI developers a way to facilitate their access to Nvidia’s compute. The strategy was seen as an expensive but necessary way to create a financing market similar to that used in the leasing of aircraft.
Nvidia has said that some of the deals could have no more than a 25% residual value guarantee, saying the initiative is designed to address concerns around circular financing.
This was seen as offering less support than other recent AI financing deals, raising expectations among some on Wall Street that Nvidia would need to get more creative.
Three banking sources, who were familiar with the matter but not part of the original financing group, said Nvidia may need to offer guarantees on all of its deals, or they may have to be backed by a revenue stream from investment-grade customers such as a technology firm to cover the debt.
For now, they told Reuters, the market is not ready to treat the chip-maker’s compute as an investment-worthy asset akin to aircraft.
MORE CERTAINTY
Nvidia is seeking to ease these concerns, the sources added, giving details that had not previously been reported.
Tens of billions of dollars of loan deals in the pipeline are likely to have strong guarantees and contracts, one source said. A second source said that some structures being explored would potentially give lenders guarantees.
These initial deals will give AI developers access to the company’s compute, and they are secured by Nvidia’s own chips and will be backed by customer contracts and by Nvidia’s underlying guarantee, said the first source.
Despite the concerns over guarantees, there remains high demand to finance the deals, the sources said.
The Nvidia spokesperson did not directly address Reuters’ questions about potentially expanded guarantees.
Chief Executive Jensen Huang has said he aimed to make Nvidia’s compute “an investable infrastructure asset”, as opposed to the typical system of customers buying subscription contracts to AI firms in order to get access to the compute.
Huang said in a blog post in August that the $500-billion initiative was designed to address concerns about circular financing, or when a company helps finance purchases of its own products. It brings independent institutional capital into the AI infrastructure market, while Nvidia’s financial partners raise money from investors to support loans, he said.
A third banking source said that lenders and private capital are expected to play a role in this funding.
Five of the company’s six financial partners declined to comment for this article, while Apollo did not respond to a request for comment.
CHIP LIFE
The CEO addressed some skepticism when he said in the post that Nvidia’s graphics processing units, or GPUs — specialized chips whose compute is used to train and run AI models — have a useful life of up to a decade.
Some credit investors and bankers see a more modest lifespan of chips generating revenue.
“Nvidia would imply that the GPUs work well north of five years, and that actually has been proven to be true thus far,” said Andrew Chang, a director at S&P Global Ratings. Yet “we take a conservative view of the value of those chips,” he said.
The first banking source said that part of the divergence in views with the company is that there still isn’t enough historical data for lenders to confidently underwrite long-term residual value based on GPUs.
“Banks typically underwrite GPUs over a 3-4 year depreciation schedule,” said Trzcinka of Impax.
“That is different than Nvidia which argues top-tier GPUs can earn revenue for a decade,” he said, adding investors are likely to seek higher interest rates, bigger financial cushions and stronger repayment protections before backing loans secured by AI chips.
“As investors, you’re going to be a lot pickier about the levels that you need to get compensated for to take incremental risk,” said Loren Moran, fixed income portfolio manager at Wellington Management, with $1.3 trillion in assets under management.
Nvidia pointed to several third-party studies that showed major cloud companies extending the depreciation periods for servers up to five to six years, from three to four.
It also pointed to a finding from Barkr, a firm that provides valuations for AI collateral such as GPUs, that the company’s most recent GB300 NVL72 systems could have a useful life of 9 to 10 years.
CHIP-BACKED LOANS
Some companies have tested the market with chip-backed loans, but, unlike Nvidia’s, these deals were backed by revenue from a technology firm to support debt payments.
CoreWeave, in which Nvidia has a stake, closed an $8.5-billion facility in the first investment grade GPU-backed loan earlier this year. The loan is rated A3 largely because lenders rely on Meta’s contractual payments, which are viewed as highly dependable.
Separately, Broadcom, an Nvidia rival that is helping finance AI computing capacity for Anthropic, backstopped more than 80% of a $35-billion financing structure, helping to attract debt investors.
Nvidia itself previously provided a residual-value guarantee to support financing for SB Energy’s Ohio data-center project, according to S&P and Moody’s.
“The precedent transactions so far would suggest that the creditor community does not subscribe to long average lives for these assets,” said Brian Gelfand, co-head of global credit at TCW, which manages more than $200 billion.
(Reporting by Saeed Azhar and Isla Binnie in New York and Max A. Cherney and Stephen Nellis in San Francisco; additional reporting by Gertrude Chavez-Dreyfuss; editing by Megan Davies and Jonathan Spicer )
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