At a time when CoreWeave (CRWV.US) bonds are under pressure, the fund manager who hit real money is firm and strong: the sell-off was an “overreaction”

The Zhitong Finance App learned that CoreWeave (CRWV.US) can survive the market's questioning of its debt. This is not a consensus opinion — some of CoreWeave's bonds are still in deep trouble, and the yield is above 15%. However, according to John Lloyd, global head of multi-sector and corporate credit at Janus Henderson (Janus Henderson), CoreWeave should be able to survive this difficult period.

“That's a bit of an overreaction.” Lloyd, he was referring to the sell-off of CoreWeave bonds—which plummeted along with its shares.

Lloyd holds 9.75% of CoreWeave bonds due 2031 in the company's Multi-Sector Income Fund (Multi-Sector Income Fund). The current yield to maturity of these bonds is 15.97%, up more than 70% from when they were issued in April. The price of a bond changes in reverse with the yield.

“Bonds have lower prices, wider spreads, and higher yields, and I don't see any significant fundamental changes in the ecosystem to support this trend, other than their higher financing costs — and I think they can play some tricks in this regard.” Lloyd added.

$51.6 billion in debt and 1,085 basis points of CDS

CoreWeave is burdened with huge debt for the construction of the data center. The company's total debt is approximately $51.6 billion, of which approximately $35 billion is notes, bonds, and loans.

The market is uneasy about whether CoreWeave will continue to finance its data centers and how expensive it will be. Its stock price plummeted 20% over the past week, and the 5-year credit default swap (CDS) spread was 1,085 basis points — lower than earlier in the day, but up 14% from week to week. Spreads of 1,000 basis points or more are often seen as a sign of a credit problem.

CoreWeave shares rose about 2% on Tuesday, continuing their decline over the previous few days and hitting a 52-week low in the day's intraday session. Its bond yields and spreads are still extremely high.

Lloyd believes this sell-off is just a bump in the path of the new cloud company. He explained that the market was frightened by the jump in US Treasury yields, and rising treasury yields would drive up corporate financing costs; as a result, the market's focus was largely on companies such as CoreWeave that face refinancing risks when interest rates rise.

CoreWeave is highly leveraged, with a debt-to-equity ratio of 702%, up from 290% a year ago. Furthermore, according to consensus estimates, CoreWeave's capital expenditure this year is approximately $36.4 billion, and the corresponding EBITDA is $7.5 billion. Analysts estimate that next year's revenue and EBITDA will rise to $265 billion and $16.7 billion, respectively, but capital expenditure will also reach $47.9 billion — which means the company may need to finance data center construction through additional equity and/or debt.

“creative financing”

Although CoreWeave's capital expenditure exceeds its free cash flow, Lloyd isn't really concerned about its ability to finance capital expenses. “Next year... they will generate operating free cash flow that can support some of these capital expenditure requirements.” he said.

He pointed out that the company could also turn to other forms of financing, such as more GPU financing—which allows it to borrow against graphics processors or leasing contracts. Additionally, CoreWeave can require its largest customers — including Microsoft, Meta Platforms, and OpenAI — to increase upfront payments.

“They can probably play enough tricks without even entering the high-yield bond market.” Lloyd said. He also added that the company does not have any recently maturing debts, which means it will not face refinancing risks in the short term.

“Best in class”

At the same time, the supply and demand pattern in the field of AI computing power should remain tight. He said that the overall adoption rate within the ecosystem is running above the consensus demand curve; plus supply-side bottlenecks — chips, memory, and electricity are all sold out — this is a good pattern for CoreWeave.

“All the data shows that this business model is working very well.” Lloyd said, “CoreWeave is one of the best in its class for getting a data center up and actually running.” He noted that CoreWeave's financial situation has improved throughout the year.

Another turning point could come from Anthropic if it goes ahead with its IPO (expected in November), followed by OpenAI. The successful launch of Frontier Labs can calm market sentiment and support new cloud operators.

“You just need more of these data points to make people feel more at ease on the demand side of AI.” Lloyd said.

CoreWeave still needs to convince the market that it can handle higher market interest rates and overcome funding bottlenecks. Lloyd thinks the company can get by, although there will be some bumps along the way. He said these bonds will recover, “it just won't be a straight line.”