It appears that trillions of dollars in artificial intelligence related off-balance-sheet
liabilities are going to come due in the next 2 years.
We're not just talking about phony companies like OpenAI and Anthropic
here. We are also talking about companies like Nvidia, Microsoft,
Oracle, Meta, etc.
Just like the 2008 housing crisis, the teaser rates are coming to an end, and
this will be ugly.
Nothing looked wrong in the summer of 2006. Home prices had risen for the
better part of a decade. Delinquencies were near historic lows. Credit
spreads were tight, the ratings held, and the securitization machine
hummed. If you had asked a hundred people on a trading desk whether the
American mortgage market was months from seizing, most would have laughed.
Millions of subprime borrowers were, at that moment, paying the low
introductory rate on a two-year adjustable rate mortgage - the 2/28 ARM. A
low fixed-rate for two years, then the rate reset
to a payment 30% to 50% higher. During those first two years the loan
performed beautifully: the borrower paid, the servicer collected, and
the bond paid its coupon. Nothing looked wrong because the whole complex - housing, mortgages,
securitization - was sitting inside the teaser period.
………
The AI boom has rebuilt this exact structure, and the market is once
again underwriting the teaser.
It has a reset wall of its own - a schedule of dated, contractual,
non-negotiable payment shocks - hiding inside the trillions of dollars of
compute contracts signed by OpenAI and other frontier labs since
2024.
The take-or-pay compute contract - the instrument at the center of the
AI build-out - has a structural feature that almost no one prices: its payments do not begin at signing. They begin at delivery.
A lab signs a multi-year capacity commitment today, but the payments do
not start until the data center is energized, the capacity is accepted,
and the contractual ramp schedule commences - an interval set not by
finance, but by construction: siting, powering, and filling a
gigawatt-scale campus takes 24-to-36 months from signature - mirroring
the two-to-three-year teaser of a subprime ARM.
More than $2.3 trillion of compute contracts now sit on the books of
the four largest American cloud providers as remaining performance
obligations and contracted backlog - signed, celebrated, capitalized
into equity prices, and, critically, not yet billing.
During the teaser period, everyone wins. The seller reports backlog
growth that compounds at rates no operating business has ever sustained
- Oracle’s RPO grew 363% in a single fiscal year. The buyer - a frontier
lab burning cash at historic rates - books no expense because the
capacity does not yet exist. The market capitalizes the booked number as
if it were revenue and ignores the billed number as if it were a
technicality. And then, on a schedule fixed at signing, booked compute becomes billed compute. The take-or-pay clock starts. From that day forward, the frontier
labs and the hyperscalers incur those costs regardless of utilization. The invoice is a function of the contract, not of demand. That is the reset.
(emphasis original)
It's happening again, less than 20 years after it happened before.
H/t Naked Capitalism.
