Interesting article. Deutsche Bank explores hedges for data centre exposure as AI lending booms.
"Deutsche Bank is exploring ways to hedge its exposure to data centres after extending billions of dollars in debt to the sector to keep up with demand for artificial intelligence and cloud computing.
Executives inside the bank have discussed ways to manage its exposure to the booming industry as so-called hyperscalers pour hundreds of billions of dollars into building infrastructure for their AI needs that is increasingly funded by debt.
The German lender is looking at options including shorting a basket of AI-related stocks that would help mitigate downside risk by betting against companies in the sector. It is also considering buying default protection on some of the debt using derivatives through a transaction known as synthetic risk transfer (SRT)."
If Deutsche is talking about hedging then likely some caution should be applied. Lot of money being poured into these assets that will depreciate fast. Throw in maintenance CAPEX spending. These companies need large revenue growth to sustain the investment.
Interesting too is OpenAI CFO Sarah Friar is asking for federal backstop to allow financing to happen. Deutsche hedging and OpenAI wanting government backstops. All bullish! (sarcasm)
Pivoting to that private credit topic I keep mentioning, TCW Groups CEO Katie Koch is apparently worried about cracks in private credit. $1.7T industry and nowhere near the regulation or DD that falls into traditional lending. I can only imagine the sins that will be coming to light soon enough. Koch said "the reality of that is, there's been a race to the bottom in terms of the covenants that are provided, the coupons that are earned".
UBS Colm Kelleher stated that issuers are shopping ratings from smaller agencies:
“We’re beginning to see huge rating agency arbitrage in the insurance business,” Chairman Colm Kelleher told his fellow financiers at Hong Kong Monetary Authority’s Global Financial Leaders’ Investment Summit on Tuesday. “In 2007, subprime was all about rating agency arbitrage. What you see now is a massive growth in small rating agencies ticking the box for compliance of investment,” he said."
U.S. life insurers have added private credit to their allocations over the years and according to this article. Marc Rowan stated though that Athene Holding LTD (Apollo ticker $APO) mostly used big three credit ratings to asses it's assets. Ratings agencies are usually ahead of the curve......right? Right?
Isn't it interesting that the fifth larges auditing firm, BDO, gave First Brands a healthy review before they blew up? WSJ reported "documents that have emerged following First Brands’ collapse show substantial discrepancies between the financial information that BDO USA validated and the financial picture that is now coming into focus".
Australian Securities and Investments Commission chairman Joe Longo is stating that in AUS private credit is on verge of a "Minsky Moment". Only a problem for Australia though, right? Right?
Mike Kelly wrote at Barron's that "the doomsayers see rapid growth and cry “bubble.” They are wrong. Private credit isn’t a bubble—it is a response to regulatory change, market concentration, and the real capital needs of private enterprise. Private credit marks a structural reshaping of American finance, making credit more accessible, more tailored, and more resilient". Since Barron's said so, I think you know what that means. We can hand wave risk away because private credit is reshaping American finance!
Few days ago it was reported Shutterfly was in talks for a $2B private credit deal with General Atlantic to help as they have 84% of their $2.5B debt due between 2026-2027. Moodys has current debt rated at lowest levels of junk with Caa2. Shutterfly did an LME in 2023 and now tapping the private capital markets for $2B.
BlackRock acquired HPS Investment Partners for $12B this year only to find out a company HPS lent money to, Broadband Telecom and Bridgevoice, allegedly committed fraud. $500M of private capital HPS lent was backed by collateral that didn't exist and was supported by emails with fake domains and forged signatures. There was a specific email domain investigators traced and found that for two years every email & invoice sent was fake.
First Brands is now being accused of fraud via fake numbers and questionable collateral plus some off-balance sheet items.
Between AI complexity and private credit I think of this quote - "one of the hallmarks of mania is the rapid rise in complexity and the rates of fraud" - Dr. Michael J. Burry
Perhaps our Emcee, Cassandra, will touch on the subject at some point now that he's returned. What say you, Obi-Wan?
-Sean |
