AI Circular Financing Concerns Mount as NVIDIA CDS Hits Record High, Sparking Wall Street Caution

NVIDIA's (NVDA-US) aggressive strategy to finance AI infrastructure development is shifting from a demand-driven tailwind to a risk factor scrutinized by credit markets. According to ICE Data Services, NVIDIA's 5-year credit default swap (CDS) rose to a record high of 82 basis points on Monday (27th), marking the largest intraday gain since the contract became actively traded in November 2025.

CDS is a key indicator of corporate debt default risk, and a widening spread typically means investors demand higher compensation for credit risk. NVIDIA's CDS was around 40 basis points at the start of the month, rose to 68 basis points last Friday, and surged further on Monday following multiple AI financing-related news reports.

Daniel O'Regan, Managing Director of Equity Trading at Mizuho Financial Group, noted that the market previously paid little attention to NVIDIA's CDS due to the company's massive scale and strong profitability. Now, the clear volatility in credit markets indicates investors are reassessing the balance sheet risks associated with NVIDIA taking on AI financing responsibilities.

NVIDIA's stock plunged 4.99% on Monday, closing at $196.51, wiping out about $250 billion in market value in a single day and closing below Apple in market cap. Apple rose over 1% that day, reaching a market cap of approximately $4.95 trillion.

Potential transaction scale could reach $750 billion.

Market concerns stem from NVIDIA's potential involvement in multiple large-scale AI infrastructure deals. Bloomberg, citing anonymous sources, reported that the total value of related deals NVIDIA is negotiating could exceed $750 billion, though discussions remain in early stages and final terms are not yet set.

Potential arrangements include providing about $250 billion in financing guarantees to help OpenAI lease computing capacity from a planned data center in Ohio; another proposal could support OpenAI's financing to purchase $350 billion worth of NVIDIA chips.

The Financial Times, citing other sources, reported that NVIDIA is also backing a $50 billion leasing deal for a data center in Texas, which will use NVIDIA's own chips. These transactions indicate CEO Jensen Huang is leveraging NVIDIA's balance sheet to fund the expansion of the AI computing market.

NVIDIA has not publicly responded to the reported OpenAI financing arrangements, and the details remain unconfirmed.

Circular financing blurs real AI demand

The credit market's biggest concern is not individual deals, but the increasingly common 'circular financing' model in the AI industry. NVIDIA provides financial support—through equity investments or debt guarantees—to customers like OpenAI and CoreWeave, who then use the funds to purchase NVIDIA chips.

While such arrangements accelerate AI data center construction, they may also tighten financial ties among chip suppliers, cloud service providers, and AI startups. Analysts worry that if customer demand or financing capacity falls short of expectations, orders once seen as drivers of chip sales could become financial burdens for NVIDIA.

Bloomberg reports that NVIDIA has announced over $540 billion in related deals since 2026, not including the rumored OpenAI financing. The International Monetary Fund (IMF) and the Bank for International Settlements (BIS) have also warned that circular financing in the AI sector could create systemic downside risks.

Billy Leung, Investment Strategist at Global X Management, said that if NVIDIA further guarantees OpenAI's data center debt, it would expand supplier financing already under market scrutiny. While such deals reflect AI computing demand, they also highlight the funding pressure facing AI infrastructure development.

AI spending pressure spreads across the tech industry

Credit market concerns are not limited to NVIDIA. S&P Global recently downgraded Oracle (ORCL-US) to BBB-, the lowest investment-grade rating, and Oracle's 5-year CDS has widened to 215 basis points.

Alphabet (GOOGL-US) last week reported its first negative free cash flow quarter since IPO due to a sharp increase in capital expenditures, further fueling market concerns about the pace of AI investment by tech giants.

FactSet forecasts that Alphabet, Amazon (AMZN-US), Meta (META-US), Microsoft (MSFT-US), and Oracle will collectively spend over $690 billion on capital expenditures in fiscal 2026, an increase of over 80% year-on-year. Excluding Alphabet and Microsoft, the other three companies may see their annual free cash flow approach zero or turn negative.

Since AI infrastructure costs are front-loaded, these companies are shifting from relying primarily on internal cash to external financing methods such as bond issuance, stock offerings, and large leasing arrangements.

Manish Kabra, Head of U.S. Equity Strategy at Societe Generale, said the market's focus in evaluating hyperscale computing firms is changing—CDS movements are now more telling than earnings per share (EPS).

Earnings to focus on financing commitments

NVIDIA has long been seen by investors as the primary beneficiary of AI chip demand growth. But as the company uses its capital and credit to support customer data center expansions, the market is now factoring in its financing commitments when valuing the company.

NVIDIA rose slightly by 0.25% on Tuesday to $197.01 per share, currently about 17% below its 52-week high of $236.54. The company is scheduled to report its fiscal 2027 second-quarter earnings after market close on August 26, with current market expectations at $2.08 EPS and $91.79 billion in revenue.

In addition to chip demand and revenue outlook, investors are expected to closely watch whether NVIDIA will disclose the scale of its financing guarantees, balance sheet commitments, and the credit risks it may be assuming.