Amid pressure on CoreWeave (CRWV.US) bonds, fund managers investing real money firmly support: The sell-off is "an overreaction"

According to Zhitong Finance APP, CoreWeave (CRWV.US) is able to withstand market concerns over its debt, which is not a consensus view—some of CoreWeave’s bonds remain in deep distress, yielding over 15%. However, John Lloyd, Global Head of Multi-Sector and Corporate Credit at Janus Henderson, believes that CoreWeave should be able to weather this difficult period.

"This is a bit of an overreaction," said Lloyd, referring to the sell-off in CoreWeave’s bonds—which plunged along with its stock.

Lloyd holds CoreWeave’s 9.75% bond due in 2031 in the company’s Multi-Sector Income Fund. The yield to maturity on this batch of bonds is currently 15.97%, up more than 70% since their issuance in April. Bond prices and yields move inversely.

"Bond prices are lower, spreads are wider, yields are higher, and at this moment, I don't see any major fundamental changes in the ecosystem to justify such a move, except for their higher financing costs—which I think they can get creative with," Lloyd added.

$51.6 Billion Debt and 1,085 Basis Points CDS

CoreWeave has taken on massive debt for data center construction. The company’s total debt is about $51.6 billion, of which around $35 billion is in notes, bonds, and loans.

The market is uneasy about whether CoreWeave can continue to finance its data centers and how expensive that financing might become. Its stock price plunged 20% over the past week, and the five-year Credit Default Swap (CDS) spread stands at 1,085 basis points—lower than earlier in the day but up 14% week-over-week. Spreads at or above 1,000 basis points are typically seen as signals of credit distress.

CoreWeave’s share price rose about 2% on Tuesday, after several days of continuous decline, hitting a 52-week low during the session. Its bond yields and spreads remain at extremely elevated levels.

Lloyd believes the sell-off is just a bump in the road for this new cloud company. He explained that the market was spooked by the surge in US Treasury yields, and rising Treasury yields push up corporate financing costs; as a result, attention has intensely shifted to companies like CoreWeave, which face refinancing risk when rates climb.

CoreWeave’s leverage is high, with a debt-to-equity ratio of 702%, up from 290% a year ago. Furthermore, consensus estimates project that CoreWeave’s capital expenditures this year will be about $36.4 billion, compared to EBITDA of $7.5 billion. Analysts estimate that next year’s revenue and EBITDA will rise to $26.5 billion and $16.7 billion, respectively, but capital expenditures will also rise to $47.9 billion—meaning the company may need to finance data center construction through further equity issuance and/or debt.

"Creative Financing"

Although CoreWeave’s capital expenditures exceed its free cash flow, Lloyd is not too worried about its ability to finance these outlays. "Next year... they’ll generate operating free cash flow that can cover part of the capital spending needs," he said.

He noted that the company can also turn to alternative financing, such as more GPU financing—allowing it to borrow against its graphics processing units or lease agreements. In addition, CoreWeave can ask its biggest customers—including Microsoft, Meta Platforms, and OpenAI—for increased prepayments.

"They’ll probably be able to pull off enough financial tricks that they may not even need to go to the high-yield bond market," Lloyd said. He also added that the company has no significant near-term maturities, meaning there isn’t immediate refinancing risk.

"Best in Class"

Meanwhile, the supply-demand dynamics in the AI computing power sector should remain tight. He said overall ecosystem adoption is running ahead of consensus demand curves; compounded by bottlenecks on the supply side—chips, memory, and power are all sold out—this is a favorable setup for CoreWeave.

"All the data indicate that this business model is working extremely well," Lloyd said. "CoreWeave is one of the best-in-class companies actually building and operating data centers." He noted that CoreWeave’s financial situation has been improving throughout the year.

Another possible inflection point may come if Anthropic completes its IPO as planned (expected in November), followed by OpenAI. Successful listings of frontier labs can calm market sentiment and support new cloud operators.

"You just need more data points like these to give people greater confidence in AI demand," Lloyd said.

CoreWeave still needs to convince the market that it can cope with higher market rates and get through financing bottlenecks. Lloyd thinks the company will make it, though the journey may be bumpy. He said these bonds will recover, "just not in a straight line."