In what is shaping up as a record-breaking, off-balance sheet SPV deal, one which will send CDS and credit yields surging far beyond where the recent explosion in AI debt has already pushed them, and as shown in the chart below, it's pretty, pretty far...

... the FT reports that Nvidia - unable to generate fund the old-fashioned way by earnings - is working with the world’s largest financial groups are to assemble a $500bn funding package for AI infrastructure development, in what will be the biggest AI lending efforts to date of any kind.

A consortium of groups including private credit (and equity) giants Apollo, Blackstone, BlackRock, Brookfield, Goldman and KKR is entering a partnership with Nvidia to invest in the AI build-out, the FT cited six people briefed on the talks.

The "partnership" as the FT calls it as it sounds a bit better than "hail-may, off-balance sheet arrangement" underscores Nvidia’s increasingly desperate efforts to raise capital for itself and its clients (because everyone now admits that circular financing is absolutely critical to keeping the AI bubble going) to continue assembling the chips, power production and data centers at the heart of the AI boom.

The $5.25tn company, whose GPUs underpin most of the leading US AI models available today, has positioned itself at the center of the AI boom, providing chips, infrastructure and software to a wide array of partners developing the technology.

More ominously, as it brings back fresh memories of the vendor financing that was in part responsible for the collapse of the dot com bubble, the chipmaker traditionally provides financial backing to help its AI partners raise debt in capital markets, which then helps boost Nvidia’s own revenue, in what has become AI's trademark circle jerk deal.

As we have discussed here for the past year, the circular nature of such transactions has raised concerns about concentrated risks in the sector, and it's why NVDA stock slumped immediately after the FT news broke, sliding as much as 2% on the FT report and wiping out more than $70bn in market capitalisation.

Separately, Nvidia was in talks to provide a massive guarantee for a 10-gigawatt data centre project in Ohio leased to OpenAI, according to a person familiar with the matter.

The deal shows how Nvidia is building relationships with the giants of the private capital industry, which are collectively preparing to invest trillions of dollars of their insurance, retail and institutional investor assets into AI infrastructure. 

In recent years, private capital groups such as Apollo and Blackstone have structured off-balance sheet ^SPV, pardon, AI infrastructure deals to assist companies like Anthropic finance their heavy spending on chips and data centers. We discussed this extensively two months ago  in "The $1.8 Trillion Off-Balance Sheet Time Bomb At The Heart Of The AI Supercycle", a topic which the FT also caught up with today. 

Nvidia, whose market cap has grown 15x since the launch of the first chatGPT in November 2022, is not the only beneficiary of the gargantuan circle-jerk deals that define the AI bubble: the biggest cloud-computing companies, including Meta, Oracle, Microsoft, Alphabet and Amazon, have also dramatically increased their spending on AI infrastructure as they look to win the race to dominate the emerging technology. Morgan Stanley projects so-called hyperscalers will spend $3.5tn between 2026 and 2028.

That need for capital has forced technology groups to tap every source of cash they can find, including public equity, investment-grade and high-yield bonds, securitised debt, private credit and project finance markets.

“[The] sheer size of the AI infrastructure build-out is unprecedented,” Jim Zelter, president of Apollo, said on an earnings call earlier this month. “More than $8tn of capital is expected to be invested, a staggering sum. We see an enormous opportunity for private capital to finance a portion of this along with public capital.”

While all that is great, it appears nobody has done the math on what happens if traditional, expensive frontier models lose to vastly cheaper, open-weight/source models. One thing is certain: the free cash flow hockeystick projected in the chart below will never, ever happen should open-weight models win the arms race. 

And now we sit back and wait to see just how far into the stratosphere this record SPV deal will send hyperscaler CDS and bond spreads.