Is AI Running Out of Money to Borrow?

how much money has been sort of just sloshing into ai companies in the last year i mean actual money going into these companies it's hundreds of billions of dollars and there's equity stock debt monopoly money i mean yeah there is a lot of money going into this that's our colleague alexander saidi who covers banking and how important is capital is funding to this industry it's like oxygen it's it is impossible to operate without it this week anthropic up the ante with the announcement of a record-breaking series of loans totaling 63 billion dollars it's so easy to just like get caught up in all of these huge numbers around ai you know trillion dollar companies you know tens of billions of dollars to you know build data centers and acquire chips but this one really stands out for the scale and size of it this is the one of the biggest corporate debt deals ever ever but to say that it was a difficult deal to get done would be an understatement that's because it's getting harder for ai companies to raise money for years investors poured money into this industry but now they're starting to feel like they've had enough there are investors right the people actually putting up the money to finance the ai boom who are saying wait wait we don't want more exposure like they have fiduciary responsibilities to people they can't just you know gamble away people's money on what a lot of people are saying you know is exhibiting signs of a financial bubble so as that reticence has kind of taken hold on the financial bubble it's a lot of people are saying you know it's a lot of people are saying a lot of investors and banks are actively trying to pare back risk is there a metaphor we can use for how difficult this was to pull off i mean i'd say it's kind of like climbing mount kilimanjaro when like a storm sets in it's like already going to be really difficult to do this and then suddenly the weather has like turned against you welcome to the journal our show about money business and power i'm ryan knudsen it's friday october 30th coming up on the show anthropic's quest to secure one of the biggest corporate debt deals of all time this episode of the journal is presented to you by accenture behind this podcast and the music you listen to spotify has a sophisticated advertising business accenture is deeply embedded in that business working with spotify to reinvent the rhythm of ad sales building maintaining and optimizing accenture finds the friction and builds the systems that make things run smoother and faster the result less time spent on operations more time connecting brands with the moments and fandoms that matter most learn more at accenture.com spotify this episode is supported by anthropic the team behind claude in business a wrong answer can cost you more than a slow one that's why nine fortune 10 companies now run on claude for the work they want to get right safety and accuracy are not just line items for anthropic that's their whole mission see how claude can support your business at claude.ai slash the journal one thing that ai companies spend a lot of their money on is semiconductor chips anthropic needs chips in order to train its models and then also be able to offer customers the ability to use claude and ask it things recently anthropic embarked on a mission to get its hands on billions of dollars worth of these chips and i wanted to get them from an american semiconductor company called broadcom so anthropic is going to use chips that are going to broadcom and google are developing together these chips that they're making for anthropic do nothing but help train ai models that's all these chips are designed to do but this ambitious endeavor had a hefty price tag 63 billion dollars even for an ai giant like anthropic that's a lot of money anthropic is kind of looking at like what are its options right it's like well you know we could ipo but do we want to spend all of our money right from the start to the end of the year i don't know if we're going to be able to do that right from the ipo just on buying chips no probably not like we want to keep our options open so they want to come away and say like okay can we borrow the money somehow to buy the chips just like when you and i borrow money when a company needs to get a loan they can go to the bank but the challenge for anthropic is that those banks think that lending to the company is risky so anthropic even though it's so popular and i think everybody thinks about claude is this like you know marquee product they are losing tons of money they are spending way more money than they are bringing in through you know sales and that means if you're at a bank it's like okay anthropic wants like 20 billion dollars they like don't show any sign of turning a profit anytime soon we can't like in good conscious like make a loan when we don't really know how they're going to pay us back banks are becoming more reluctant to lend to their clients and to make loans to ai companies because of what happens after the loan is made typically a bank doesn't sit on all the debt and wait for it to be paid back it actually repackages it and sells it to investors like hedge funds and insurance companies but these days investors are getting a bit wary first of all interest rates are going up so for any level of like capital intensive economic activity it just means that like the hurdle you have to clear is higher right you know you're going to have to pay more in interest to borrow money you know that means you're going to have to realistically be able to prove i can generate enough cash flow to meet debt service payments on top of that some investors worry whether ai companies like anthropic will ever earn enough money to pay back all that debt i'm talking to investors at insurance companies uh at asset managers and banks too where their risk departments are like no more ai like we have looked at like the total amount of risk we're taking you cannot put more in the ai bucket there's too much concentration so all of this is allowing lenders to be pickier about what deals they're going to choose to invest in this is the environment in which anthropic wanted to get a hold of those billions of dollars of ai chips and the bottom line is the company couldn't buy them all on its own and banks didn't want to lend the money either you can't buy them all on its own and banks didn't want to lend the money either so anthropic turned to broadcom can you introduce us to broadcom what what does this company do so yeah they're a enterprise software company also they design semiconductors and chips they have a really um well-known ceo named hawk tan who's this like kind of legendary deal maker he has really grown this company um into a juggernaut and he's a pretty well-known figure on wall street what broadcom and anthropic decided on was a pretty complex arrangement and broadcom would do it through a shell company the shell company is the one that is essentially buying the chips the shell company is the one that's borrowing the money from the banks and the shell company is the one that's taking the lease payments from anthropic but it's being done because it kind of helps everyone get an arm's length away from the risk so to recap the company selling anthropic chips would also be the company helping it pay for them why would broadcom want to do this they are the supplier to anthropic right like they they want anthropic to buy chips from it and broadcom is like kind of solving a problem for itself as well as for anthropic which is how can we help you get the money to pay us essentially and broadcom was in a good position to handle the financing for this deal because unlike anthropic broadcom has a great credit rating so they are kind of coming to the table and they're kind of coming to the table and they're kind of coming in and i've been kind of comparing it to like the parent of a child that's trying to rent an apartment essentially and the the kid is like maybe gonna like you know make a ton of money one day but right now on paper they look pretty broke so broadcom is kind of going to the landlord which in this case is the banks and saying like hey like we got them if for whatever reason they can't make their rent payment just call us and we got you ultimately anthropic would still be the one that has to pay the rent broadcom is acting as the intermediary with their name on the lease and how did banks receive this proposal from broadcom anthropic you know the banks were kind of looking at the amount of risk they were signing up to in this and getting pretty nervous so the hurdle was to overcome both the the financial challenges of doing this deal and the sort of like mental challenges of doing this deal and the sort of challenge of can we convince investors that this is worth committing you know 63 billion dollars too. How Broadcom and Anthropic got the deal over the finish line? That's next. is here to make things less painful and nerve-wracking. It gives your job post a boost to reach quality talent faster. Plus, it can help put your job in front of exactly who you're looking for based on criteria you set, like if you need certain skills or certifications. And it works. Sponsored jobs posted directly on Indeed are 95% more likely to report a hire than non-sponsored jobs. So spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a chance to learn more about Broadcom and Anthropic. Get a $75 sponsored job credit at Indeed.com slash podcast. That's Indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed sponsored jobs. Have you ever wondered how movements start? I'm Ashley C. Ford, host of Into the Mix, a Ben and Jerry's podcast about joy and justice. This season, we're talking to unexpected progressive heroes who found purpose in unexpected places. People like Marlee Diaz, who's a big fan of Broadcom and Anthropic, who's a big fan of Broadcom and making sure every kid sees themselves in books. Kyle Mesteth, a native skateboarder building a movement for kids nationwide. Joy Aladakun, whose music moves from protests to daily commute. Find out how they started something bigger than themselves and listen wherever you get your podcasts. Negotiations between Broadcom and the banks have been dragging on and started to heat up last weekend. According to Alex's reporting, Broadcom and the banks have been dragging on and started to heat up last weekend. Broadcom's CEO, Hawk Tan, personally stepped in to make sure the banks didn't get cold feet. He was essentially forcing the banks to the table and being like, I will pay you more. I will ensure you get the guarantees you need, but we are going to secure this capital this weekend to ensure in a way that we will get paid. So what kinds of assurances did Tan make? The big thing I would say that happened over the weekend was one, he agreed to pay, to have essentially a bigger interest rate in this transaction, which means that Anthropic is going to have to pay more. According to people familiar with the matter, banks also got more comfort around guarantees from Broadcom that will protect the banks from losses in case Anthropic defaults on the loans. And again, this speaks to Hawk Tan and his sort of like stature with these banks. You know, he is a real deal maker. He's been someone that's made bankers a lot of money over the years. So I think he was really leaning on those relationships to help get this done. But if banks were reluctant to lend to Anthropic, why would they be okay with this arrangement? Because everything still depends on Anthropic being able to pay back this loan. Well, it's complex because, you know, banks are like, you know, it's not like it's one mentality, right? You have executives who are trying to compete with other banks and grow the bank's share price. So they want to pursue business. And this is like the fastest growing. industry right now that everyone wants to be a part of. And every bank is trying to prove like we are the go-to partner for this critical industry. The Broadcom deal was finalized, and it was formally announced on Monday. Several banks agreed to lend Broadcom $40 billion. Another chunk of debt, partially financed by Blackstone, brought the total to $63 billion. Broadcom's arranging a $63 billion deal, to finance the purchase of chips for Anthropic, is being done. In a public statement, Broadcom's Hawk Tan said the deal, quote, validates that there is capital available to finance such growth, and that Broadcom is uniquely positioned to enable it. The deal represents the largest amount of debt ever raised for AI. And thanks to Broadcom's sterling credit rating, this debt could eventually be sold to the investment-grade bond market, which is one of the biggest and safest, markets in the world. This is like where investment-grade companies like Coca-Cola will go to raise money. This is like, I run a pension fund. I need to make sure people can retire. I need to get my three or four or five percent on investment. Like, the way that Broadcom and Anthropic and the banks structured this deal is allowing what's essentially a really risky company, Anthropic, to tap the same markets that Coca-Cola would. The same day this deal was announced, Anthropic released a document that details the company's finances before its IPO, something called an S-1. The document revealed another interesting detail about Anthropic's relationship with Broadcom. Broadcom, in addition to all the things it's doing that we've described with the guarantee and the supplying, they're actually lending money to Anthropic that it can use to pay it back. So the, like, the level of, like, interconnection between these companies is really, really fascinating. This is what people watching the AI industry call circular financing. All this money being handed back and forth between the same companies. In a circular financing arrangement, I might have a lot of money, and you might not have that much money, but I can just give you some of my money that you can then give back to me. And it appears like, wow, like, you know, you've paid me all this money to buy all these super valuable chips. Circular financing is a concern because essentially, all this money can kind of make companies appear to be more valuable than they really are. It can make revenues, you know, be higher than they are. It just sort of, like, adds more air to the bubble in a way. And there's a level of interconnectedness so that if, like, the bubble does pop, everybody's sort of tied together. Well, right. All these interconnections means if one party goes down, then, like, a lot of other parties could go down. And I'm not saying that's the case here, but from a risk. management perspective, right, you should be conscious of what's going on here. What does it say about the state of the AI industry that financing like this is necessary? Yeah, I mean, it just goes to show, like, there is a clear mismatch between what these companies need from a capital perspective and what is available to them in the marketplace. I mean, it's just a sign that, like, you know, there are some growing pains in this industry, but this is why Wall Street exists. It's like, how can we find ways to connect the existing pools of capital to those who need it? Is it a sign, though, that potentially there's some slowdown coming in AI growth? You know, I mean, sort of getting to a point where it's harder to finance this stuff. Yeah, yeah, yeah. It will definitely. It points to a consolidation for sure. I think it is widely expected that there will be fewer and fewer players over time because, you just, you need so much money to win. But it also shows the conviction of those who are playing in the game to win. Like, they will contort themselves and do whatever it takes to make sure, like, they're calling the winning horse and that when there's, like, a victory coming in the form of, like, huge amounts of money to be made, that they're the ones, like, at the center of it. This is a lot of money at stake. And that's why I think people are thinking carefully about the risks involved. Over the past couple days, there's been a big sell-off in tech stocks. Disappointing earnings from Intel and Amazon have raised questions about tech companies' massive spending on AI. And yesterday, Alphabet, Google's parent company, lost $500 billion in value, its worst day ever in the stock market. That's all for today. Friday, October 30th. Additional reporting in this episode by Anissa Gardizi and Matt Wertz. The Journal is a co-production of Spotify and The Wall Street Journal. The show is made by Catherine Brewer, Evelyn Fajardo-Alvarez, Pia Gedkari, Max Green, Sophie Codner, Matt Kwong, Colin McNulty, Jessica Mendoza, Imani Moise, Laura Morris, Enrique Perez de la Rosa, Sarah Platt, Alan Rodriguez-Espinosa, Heather Rogers, Katie Shepard, Pierce Singhi, Jeeva Kaverma, Tatiana Zamis, and me, Ryan Knudsen. Our engineers are Griffin Tanner, Nathan Singapak, and Peter Leonard. Our theme music is by So Wiley. Additional music this week from Catherine Anderson, Peter Leonard, Bobby Lord, Emma Munger, Nathan Singapak, Griffin Tanner, So Wiley. And Blue Dot Sessions. Fact-checking this week by Naomi Barr, Najwa Jamal, and Kate Gallagher. Thanks for listening. Happy Halloween.