Short read: Three AI Megadeals Are Breaking New Ground on Wall Street

Plenty has been said and written about the unprecedented data centre capex boom but even if the end seems familiar, no one knows how or when. Enter Wall Street. If the incestuous deals between Nvidia, OpenAI, Oracle, etc seemed innovative enough, this piece in the WSJ throws light on three financing deals which shows Wall Street at its ‘innovative’ best. (As an aside, Paul Volcker once famously referred to the ATM as the only useful innovation in finance ever)

In defence of the hundreds of billions spent on datacentre capex, the hyperscalers have been spending from their cash pile until Meta’s recent issuance of debt. Now, these deals show how Wall Street is cleverly structuring debt financing and offloading risk. Sounds familiar?

The three deals referred to are Hyperion involving Meta and Blue Owl, Jacquard involving Open AI and Oracle and Colossus Chips involving xAI and Apollo.

Here’s the explainer on the first to give a taste:

“The Hyperion deal is a Frankenstein financing that combines elements of private-equity, project finance and investment-grade bonds.

Meta needed such financial wizardry because it is already borrowing by the bucketload to build AI, issuing a $30 billion bond in October that roughly doubled its debt load overnight.

Enter Morgan Stanley, with a plan to have someone else borrow the money for Hyperion. Blue Owl invested about $3 billion for an 80% private-equity stake in the data center, while Meta retained 20% for the $1.3 billion it had already spent. The joint venture, named Beignet Investor after the New Orleans pastry, got another $27 billion by issuing bonds that pay off in 2049, $18 billion of which Pimco purchased. That debt is on Beignet’s balance sheet, not Meta’s.

The notes bear a 6.58% interest rate, much higher than the 5.5% yield on Meta’s comparable corporate bond, and have an A+ credit rating, one notch below Meta’s AA-.

That’s the simple part. Meta will pay rent to use the data center for its AI products and that cash will go to bond interest and principal payments, as well as dividends for Blue Owl. But Meta retains the ability to exit its lease every four years so that the rental agreement won’t count as a long-term liability on its balance sheet.

That is where the unusual guarantee comes in. In exchange for the option to walk away, Meta agreed to make investors whole if it ever did so. In that event, Blue Owl would sell the center, using proceeds to first pay outstanding bonds, then itself. If the sale fetched less than bondholders were owed plus what Blue Owl had invested with a modest profit, Meta would pay the difference.

“It’s a fixed-income risk with an equity-like return,” said Alexey Teplukhin, a managing director at Blue Owl. “That’s what we’re aiming for.””

That last sentence sums up how awry risk pricing has gone in today’s world.