CoreWeave’s debt is layered around customer contracts

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 29:57

   Well, it's a mix. So we should probably step back a little bit because Corriev has a reasonably complicated, multi-layered debt capital structure. You're going to tell us how creative they've gotten. All right. So the foundation of their borrowings are really what they call delay-draw-turned-loans. And this is essentially secured borrowing against contracted revenue that they have with the GPUs posted as collateral.

2. 30:23

   So let's say that they sign a deal with Microsoft for five years. what they will do is take that contract, put it in a box, take the GPUs, put it in the box, and then go to a lender, and the lender will underwrite that revenue stream from Microsoft and loan money against it. It's essentially receivables factoring. And that's the bulk of their debt. Basically, again, secure lending. They also use some vendor financing, say, from Dell.

3. 30:53

   That tends to be the safer portion of their debt capital structure. it's closer to the assets and the interest rates are naturally lower as a result um you move up and then to the extent that lenders depending on the credit quality of the customer may loan 70 to 90 percent of the value of the gpus in these secure deals CoreWeave needs to plug the remainder with essentially parent company debt so it has a residual claim on those assets and that's where you've seen the rates spike recently um for straight parent company debt it's probably gone from 9% or 10% several months ago to closer to 15% today. They also have some convertible debt outstanding. So in that case, the interest rates are lower today, but if the stock does well over time, they can get converted into equity and dilute shareholders. What's really

4. 31:40

   interesting about this dynamic is that if you look at CoreWeave's enterprise value today, it's probably 60% equity. And again, without getting into the weeds, you typically don't find distressed companies with 60% equity as part of their enterprise value tends to be a lot lower. So there's a bit of a mismatch in terms of what the equity market is saying about Corwe's prospects and what the debt markets may be saying. But again, the 15% interest rate number that's gotten a lot of attention recently is for a portion of their debt capital structure closer to the equity.

5. 32:15

   And that's where a lot of the pushback or a lot of the tension in the markets has been um that high yield component i think the the secure debt component is probably not an area where they're going to have a lot of issues raising capital prospectively have you talked to the company at all in in the last week uh as they've sort of navigated this this recent um reaction from investors no i haven't spoke to the company but they've made you know comments that were either public or yeah made privately but intended to be public effectively i i'm just wondering if if you've gotten a sense uh if they have changed anything about their strategy not just in the last week but maybe a lot maybe the last couple months to uh ...to get ahead of some of these risks, or if you've gotten the sense that they're going to change anything, you know?

6. 33:09

   Well, certainly, you know, they have historically been very focused on the use of debt to scale the business, the argument being that to deploy the amount of capital that they want to deploy using anything but debt would result in essentially an obscene amount of equity issuance and dilute their shareholders into oblivion. um they um after the second quarter you know they issued a a reasonably large convertible bond i think it was four billion or thereabouts um so they have some capital some cash on the balance sheet from that they have a number of delayed draw term loans that they have not fully drawn down yet um they've got about five billion in cash on the balance sheet so i think in total between those things they have about 22 billion or so in liquidity available which is probably sufficient

7. 33:56

   to carry them through the end of the year or thereabouts. So I would think by year-end, they probably need to come to market again to raise additional capital, and we'll see what happens. They did put an ad the world will. Well, we'll see what happens, meaning... How the capital markets respond to that. And if they don't, I mean, if they don't, then that's going to be pretty dicey, right? Absolutely, and that's the risk they pay because the sheer quantum of capital they require means that capital markets need to be open for them to draw what they need.

8. 34:29

   You know, they did put an at-the-money offering in place. That means sell equity into the market. My anticipation, or my expectation rather, is that they probably lean a little bit more heavily on equity, respectively, try to lop off some of this tail risk that comes from being so levered to the debt markets remaining open at reasonable terms. But we'll see. That's kind of my read on the situation as opposed to anything the company has set out, right?

9. 34:58

   So the other risk, I guess, that I've been hearing about is sort of this refinancing risk. If they need to refinance any of this debt, to what extent they will be able to do that, what rates they'll be able to do that, whether or not they'll be able to meet their interest payments. That's why I was asking about the fixed versus floating and the extent to which any of these interest payments will change.

10. 35:21

    I don't have a great idea of the extent to which interest payments will get. More expensive by census, it could, right? Yeah, so the parent company debt is, I don't think they have a maturity until 2030 or thereabouts. So the parent company debt, they're not going to have to refi that for some time. The delayed draw term loans do have an amortization schedule, so they pay those down as they collect from the underlying customer contracts.

11. 35:50

    Those are typically floating rate instruments. So for plus a spread. But in many cases, the lenders actually require that they that they hedge that exposure. So I think, you know, there is some potential for rates to increase in the in the near to medium term with the broader rise in interest rates. But in terms of a big refinancing wave, probably not on the horizon for for some time.