Broadcom and SpaceX have announced two major financing deals this week. Broadcom has lined up $63 billion from major banks and Blackstone. SpaceX is leasing $40 billion in chips from Apollo, or at least a corporate entity affiliated with Apollo. I want to bring on Gil Luria, head of technology research at D.A. Davidson, and Dan Campbell, our finance reporter, for their analysis. Gentlemen, welcome to the show. It's great to have you here. Gil, I want to start with you. So, these deals feel like they have similar flavors. The way that I understand it, and you're going to correct me here if I get this wrong at all, we've got SPVs, which are separate from the company, separate from Broadcom, separate from SpaceX. The SPVs are the ones that are raising the debt. And then we've got the AI companies, SpaceX, and in Broadcom's case, Anthropic, that are leasing chips from the SPVs that the SPVs have bought. Do I have this correct, Gil?
I don't like it any more than you do. Right. Remember where we learned that term SPV? We learned it from Enron. We don't like that at all. Now, the big difference is Enron had these, right? That was illegal. SPVs are legal. They're just a way to take debt off your own balance sheet and put it elsewhere. It doesn't mean that there's not a line in your balance sheet for operating leases and financial commitments, etc. It is on the balance sheet, but it doesn't go on the debt line, which has implications both in terms of financial analysis as well as underwriting. This is, as long as it's allowed, as long as investors put up with it, it's going to continue. We don't have to like it, but it's going to continue. There's a lot of capital, debt capital, looking to invest in AI. That's a mandate many fixed income managers have, is to invest in AI, get high yields in what is a promising area. And they would like to partner, they would like to lend that money out to the biggest, most creditworthy customers, and that's Microsoft, Amazon, Google, SpaceX, Anthropic, Nvidia. And if they can't lend to them directly, at least they're happy to take the guarantee from those companies through a special purpose vehicle, a third-party entity that would operate these data centers. So again, don't have to like it, right? But that's why they're doing it.
Okay, but Dan, I mean, look, Elon's putting out these tweets. I mean, you know, debt markets are closed off. I forget his exact wording, but and we've certainly written about how debt is becoming more expensive. So, help me reconcile this with the mandate that Gil is talking about.
Yeah, I think what we've seen here and this week is the fact that the largest companies in the world and the most creditworthy companies in the world can still get deals done. You know, Broadcom, Nvidia is sort of a partner to the SpaceX deal in terms of selling their chips. You know, these are some of the strongest balance sheets in the world, and so they are getting deals done in these credit markets. It's worth noting, you know, the Broadcom debt is at a higher interest rate than maybe, you know, Anthropic might be wanting to pay on the lease. So they are having to sort of pay up a little bit to get deals done, but the deals are still getting done. Contrast that to smaller neoclouds that Elon Musk was talking about. Many of those deals are not getting done or are taking different form. So it's a sort of a story of haves and have-nots, maybe.
So Gil, I mean, the whole reason for using this structure is to sort of separate the debt from the company's own balance sheets. And like you just said, I mean, it does show up in some way, but I guess it's meant to reduce risk for the companies that are leasing these chips. My question for you is, there is still some risk involved here, right? Like, isn't there reason to be systemically concerned about these deals?
Yeah. We shouldn't finance speculative investments with debt, right? That's how we get ourselves in trouble, and that's what is happening now. And again, we have cash on hand for the big hyperscalers in Meta and SpaceX. We have very strong cash flow, at least for the first four. That it makes sense to make speculative investments, in which data centers are. They're speculative investments. The rate of growth of AI we can be optimistic about, but it's highly unknown. Using debt to finance speculative investments, never a good idea. That's how you get in trouble. That's why everybody's warning about a bubble. Now, to be fair, most of the data centers to date have been financed with cash on hand, with equity, etc. But now we are starting to load more and more debt onto this, and for our discussion, that may be running out. If Broadcom has to pay up and the neoclouds are mostly out of the game, we may not be able to continue on this trajectory in terms of finding more and more debt to finance this build-out. And I'd argue that's very healthy. We should build data centers with the cash we have. That's the right way to do it. And see how it goes. And if we have slightly less data centers than we need, that's okay. The data centers will be worth more. The chips will be worth more. We'll still be able to grow the use of AI. But we're at a moment where we're going to have to see if capital markets still continue to allow this, or they may seize up completely.
Well, Dan, one question I had for you. You and I were talking this morning in the newsroom about this. I mean, in the case of the Broadcom deal, you've got these banks that are going to need to syndicate the debt out. And so, I guess my question for you is, is there another sort of layer of demand that we have to see play out? Are these guaranteed to find buyers as the banks seek to unload this debt, or is that still a variable here?
No, that's definitely still a variable here. Citi and Bank of America were the two big syndicating banks in the Broadcom deal. They have some concerns. We believe, and some reporting suggests this, that they are going to be able to syndicate the debt in a way and get it off their balance sheets in a way that they are happy with. So, we really need to see a long tail of banks wanting to buy into these deals still. And the announcements this week, you know, they contemplate that. They wouldn't make the announcement if they didn't think they could syndicate the deal as it's currently structured, but that hasn't happened yet. And so, it still remains to be seen if they can, and if there are other buyers down the line who want this debt at these levels.
