Banks are now trying to offload the AI data center debt they just underwrote

Probably related to the now three Oracle data center that can’t get electricity.

Wisconsin passed a law that fast tracking large projects requires a high credit rating or collateral, to pay secure costs for building the power plants needed for the data center. In July Oracle’s debt rating was downgraded to near junk levels.

That means Oracle can no longer get Wisconsin to supply power to the data center so it’s a $15 billion dollar paper weight. Thats putting even further downward pressure on their credit rating and ability to secure loans to meet their $500B in obligations.

Now Oracle’s New Mexico data center is stuck due to contract issues with water and gas turbines, so they can’t move foreward. Oracle has a 9% interest rate on the loans to build that, then they raise 2% after construction, because their credit rating is dogshit. So now Oracle is claiming force majeur to get out of their increased debt obligations, which you can imagine, is killing interest in lending to them.

In Texas they just blocked new grid hookups over political backlash to skyrocketing electricity prices. That killed another Oracle expansion they just canceled, and another one is trucking in gas for gas turbines as an alternative to the electrical grid, which you might imagine is expensive.

Which brings us to now. The banks are looking at local opposition blocking these projects (local action is working), states are blocking them to avoid getting voted out, hardware costs are shooting up, and the assets backing these loans are too small for so much investment.

So the level of risk no longer works.

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My personal theory is that Oracle is a sacrificial lamb. It’s a dead end tech company that lives on licensing fees, and they’ve fucked themselves on these expansions. They’re failing at being a hyper-scaler as margins decrease.

I bet we see someone take Oracle private when their stock collapses, freeing the board of fiduciary duty to the stakeholders with a payout. This move is critical because it blocks other hyperscalers from putting in an offer to acquire their assets to shore up debt.

OpenAI will acquire the now private Oracle through a special funding round and buy up their hardware for pennies on the dollar. This will absolve them of the debt obligations Oracle has to OpenAI that have killed their credit ($500b), and stabilizes the Oracle balance sheet.

OpenAI will write this down and offer Oracle’s creditors equity stakes in lieu of cash, and will have acquired all their next gen hardware far cheaper than their competitors.

This might even fuck over Nvidia, the incestuous funders of the AI circlejerk. If Oracle gets to write off their GPU debts then Nvidia loses a fuck ton of sales, tanking their stock price — they take that OpenAI equity offer and look like they’re playing the game. OpenAI wants to build their own chips anyways, just look at jalapeño.

I don’t think it says anything about specific data center risks: capitalizing loans is standard operating procedure for these banks. It gets the loans off their account books, so they don’t have to hold capital to balance the risk, but they still get to collect management fees on the loans, regardless of whether they default. The big stories back in the 00s were residential real estate loans, but they do the same thing for commercial and industrial property.

this finbabble makes my head spin bois how is all this even allowed

I offer you an IOU. I’m on a good streak, and the IOU is that I’ll pay you back over time with interest.

You accept. You then find 9 other people offering IOUs of varying reliability.

You package up all the IOUs into an asset group. In theory we all pay you back regularly, but some of us will not. With 10 IOUs it’s unlikely we’ll all default, so the asset is safer and your risk models can assess this.

You still have the same amount of debt and risk on your hands.

You turn sell the rights to the payouts from the group, in exchange for cash now, because paying $X for payback of Y% interest over Z years with Q risk is an easy to reason about deal.

But your potential buyers squabble over Q, some don’t want to lose anything, some want to be risky.

So you split that risk level out into groups and say “if the overall goes down, this group pays first, then this group, then this group”, and you’ve created a securitized asset.

You’ve now sold off these assets to various groups, with defined risk levels, and you’ve made back money to offset what you paid out to the initial 10 IOUs.

Now imagine you took IOUs from crack addicts who are talking a lot about the power transformer behind the mall. They say they need money for tools and this will be the big one. You’re intrigued.

Odds are good this will pay off you think, those crackheads were excited and confident.

Later that day you hear sirens. Like, a lot of sirens. It’s coming from the mall area. Huh.

You still haven’t sold off all the slices of your asset, you were maybe hoping for more upside, and selling can take a while. But those sirens… they’re concerning.

Maybe it’d be a good idea to swap out your asset for another one, or offer those slices at a discount for some higher than expected risk. So you go out and start making phone calls hoping someone else isn’t worried about it. The only people who are less worried are a biker gang you normally wouldn’t do business with, but you figure for a discount they’re happy to deal with the crackheads.

(This was more about securities than recapitalizing, but kinda the idea)

With 10 IOUs it’s unlikely [they’ll] all default, so the asset is safer and your risk models can assess this.

This is where my spider senses go off. Are we assuming that these IOUs defaulting are independent events? Even though they’re from 10 crack heads talking about stealing the same generator?