AI Chip-Backed Loans Surge as Tech Firms Seek Funding

As investment in artificial intelligence continues to accelerate, tech companies are increasingly turning to a novel form of financing: loans backed by the very chips that power their AI models. This trend, gaining momentum since late 2023, offers a way to fund massive AI investments without burdening corporate balance sheets.

The Rise of GPU-Backed Debt

These loans are secured against graphics processing units (GPUs) – the specialized hardware crucial for training large language models – and often backed by leases to the tech groups themselves. Investors are attracted by yields ranging from the high single digits to the mid-teens, typically exceeding those offered by traditional tech company debt Financial Times.

David Ridenour, a partner at King & Spalding specializing in finance and restructuring, noted the investor enthusiasm: “Investors are very excited. People are willing to dive into [GPU deals] on a take-it-or-leave-it basis.” Financial Times

How GPU-Backed Loans Function

The structure typically involves special-purpose vehicles (SPVs) formed by tech companies and investment firms. These SPVs acquire high-performing chips, which are then leased to the tech businesses for AI model training. This allows companies to keep the debt off their corporate balance sheets.

Recent examples include Apollo’s $3.5 billion financing package for a digital infrastructure fund managed by Valor Equity Partners, which will purchase Nvidia’s GB200 “AI superchips” for lease to xAI, Elon Musk’s AI company. IREN Limited, an AI cloud service provider, also secured a $3.6 billion loan commitment from Goldman Sachs and JPMorgan to acquire chips for Microsoft’s AI contracts. Financial Times

Speed and Risk in a Fresh Market

GPU financing often requires swift action from lenders. A lawyer familiar with these transactions described scenarios where lenders are asked to commit “a couple hundred million” to deals closing within two weeks. Financial Times

The rising popularity highlights investor demand for asset-backed finance, seeking debt secured by stable cash flows. Deals frequently include “hell or high water” clauses to prevent early lease termination, mitigating the risk of GPU obsolescence. Still, the lifespan of GPUs remains a key concern.

Dorina Yessios, US co-head of energy, infrastructure and natural resources at A&O Shearman, emphasized the require to factor GPU lifespan into underwriting, similar to other equipment financing. Financial Times

Valuation and Future Outlook

Moody’s, now rating GPU-backed debt, typically withdraws ratings once the underlying leases expire, focusing on repayment within the initial lease term. Financial Times

Despite the growing interest, some investors express caution about the economic life of GPUs and the potential difficulty of reselling older chips. “We really want to ensure the GPUs’ useful life well exceeds the amortised period of our investment,” said Jen Marques, head of strategy and structuring for Oaktree’s structured credit strategy. Financial Times

One investor bluntly stated, “Those things won’t make it three years before they are antiquated. It’s a huge gamble,” adding that reselling older GPUs is “like beating a dead horse.” Financial Times