JPMorgan strategist Justin Biemann said that the cost of insuring the debt of an AI company reliant on financing indicates a roughly 50% or higher chance that it will default within five years.
According to CoinDesk, Biemann, global investment strategist at J.P. Morgan Private Bank, said in an October 23 report that the AI label alone no longer convinces lenders. Companies are expected to show that they can finance their investments, repay their debt and, over time, turn high spending into cash flow.
Elon Musk issued a similar warning on Sunday, saying that AI cloud companies whose revenues depend largely on data centers are finding it harder to secure debt financing.
More Than $1 Million a Year to Insure $10 Million in Debt
The AI infrastructure company Biemann did not name has taken on tens of billions of dollars in debt and other liabilities. Its five-year credit default swap (CDS) premium has risen to 1,100 basis points. A CDS is a financial contract that provides protection against the risk that a borrower will fail to make payments; at this premium level, the annual cost of insuring $10 million in debt exceeds $1 million.
According to the strategist, this pricing indicates an estimated five-year default probability of close to or above 50%. The same measure was below 30% a year ago.
Morgan Stanley data also reveal an increase in transactions protecting against debt risk. The weekly average of CDS transactions linked to bonds issued by Oracle, SpaceX, Alphabet, Amazon, Meta, Broadcom and Nvidia was below $2 billion in July, but exceeded $9 billion in September.
Risk Is Not the Same Across All AI Companies
Biemann said that five-year protection premiums for large AI companies with strong cash flow remain in the 50–120 basis point range. Although premiums are approaching 300 basis points at some established infrastructure companies, pressure across companies with investment-grade credit ratings is more limited.
The strategist attributed demand for CDS on large companies more to the need to protect portfolios than to expectations of financial distress. The main concern centers on business models with high spending and limited cash flow that must continuously secure new financing from debt markets.
As an example of CDS’s early-warning function, Biemann cited Lehman Brothers, which went bankrupt during the 2008 crisis. The bank’s protection premium was below 100 basis points in the third quarter of 2007, but exceeded 1,400 basis points in September 2008. However, the strategist stressed that today’s indicators are warning signs to monitor, not a definitive timeline for a crisis.
Why It Matters for Bitcoin Investors
AI investment is among the key themes supporting risk appetite in financial markets, including crypto. CoinDesk’s analysis notes that financing problems in this area could weaken investor appetite and spill over into crypto as well.
According to the data cited in the article, the tech-heavy Nasdaq has fallen about 7% since October 6, from 31,360 points to 29,263 points. The declines have been steeper for AI-linked companies such as Nvidia and Oracle. For Bitcoin, the question to watch is whether pressure on companies from debt will turn into broader risk aversion.
Not investment advice.