The CEO of BlackRock just compared Wall Street's newest invention to mortgage-backed securities…
What’s scary is that he meant it as a compliment.
It comes off the back of Nvidia CEO Jensen Huang unveiling a $500 billion plan this week.
Alongside banking and private equity giants including Apollo, BlackRock, Blackstone, Goldman Sachs and KKR.
The purpose is to standardise how AI chips get financed, and it exists because Nvidia has a problem…
Plenty of the companies that want Nvidia chips but can't afford to write the cheque.
So Wall Street has come up with yet another “clever” financing move…
A shell company gets set up, this company to hold one pile of assets and nothing else.
Investors lend this new company money, which it then uses to buy Nvidia hardware.
It then leases the hardware to an AI company, with the lease payments flowing back out to investors as interest.
Do that a few hundred times… package the loans… sell them to pension funds and insurers… and you have what the people involved are calling a new asset class.
Now the structure in itself isn’t anything new…
Wall Street has been doing it for yearsd for securitisation of aeroplanes, credit cards and mortgages.
But it all comes down to shelf life.
An aeroplane bought in 2000 is still flying passengers around today…
My house was built in 1958… and last time I checked… it’s still standing.
But cutting edge chips? Those certainly haven’t displayed anything close to that longevity. We’re talking 6 years max.
Nvidia’s pushback is that their customers still run older-generation chips, which he offers as evidence they hold their value. The executives on the deal go further and argue that demand so badly outstrips supply that the chips make excellent collateral.
Maybe.
But then why does Nvidia need to guarantee them?
Because Nvidia may use its own balance sheet to backstop as much as 25% of a project's cost.
So if the chips end up worth less than the loan assumed they'd be worth, Nvidia makes up part of the difference.
Nvidia isn’t the first to do this, Broadcom did the same thing on a $35 billion package that Apollo, Blackstone and a group of banks arranged in June to lease chips to Anthropic.
And I’m not particularly worried about Nvidia and Broadcom here… but smaller companies borrowing at higher and higher rates. CoreWeave is already paying 10% interest on some of it’s bond deals…
Debt investors are not a sentimental group. They look at the collateral, look at the borrower, and they price it accordingly.
Tomorrow I’ll talk about how this is creeping into pension funds too…
Oliver