Musk's "Financial Skills": How financially-strapped xAI finances the "World's Strongest Computing Cluster + Large Natural Gas Power Plant"

Elon Musk's xAI is attempting to build and control the world's most powerful data center and a large natural gas power plant to supply it, but the company's tight financial situation has forced it to adopt unusual financing arrangements, shifting much of the funding pressure and risk to external partners.

According to The Information, Musk's long-time supporter Valor Equity Partners is raising $20 billion for a special purpose vehicle (SPV) to purchase NVIDIA chips and lease them to xAI. This arrangement means that xAI does not initially own the hundreds of thousands of NVIDIA chips planned for deployment at the second super-large data center, Colossus 2, in Memphis, nor will it control the natural gas power facilities supplying that center.

This financing structure highlights a reality: investors find it difficult to easily write sufficiently large checks to support Musk's strategy. The entire financial structure relies on xAI's ability to generate enough cash flow to pay lease fees while repaying the raised debt. The $5 billion debt package raised by xAI in July of this year has interest rates on bonds and loans as high as 12.5%, comparable to the financing costs of financially troubled companies. Media reports previously indicated that xAI is burning through $1 billion a month.

$20 Billion Chip Leasing Plan

According to insiders, the SPV consists of $7.5 billion in equity and $12.5 billion in debt, with the equity portion led by Valor and NVIDIA contributing up to $2 billion in equity. The SPV will lease the chips to xAI for several years, with xAI having the option to purchase these chips at the end of the lease term.

This deal shifts the fundraising and most of the risk to Valor Equity Partners. The venture capital firm manages approximately $17.5 billion in assets and has achieved great success by supporting several of Musk's projects, but is now venturing into large, complex infrastructure projects, which is quite different from its traditional investment fund management business.

Valor's Chief Investment Officer Antonio Gracias is a long-time partner of Musk, serving on the board of SpaceX and having worked earlier this year in the government efficiency department led by Musk.

The SPV only pays for the chip costs, excluding the energy infrastructure or other assets required for Colossus 2. If xAI no longer needs these chips, the SPV can lease or sell them to other companies. This arrangement allows xAI to avoid upfront cash payments.

According to insiders, xAI owns the land for Colossus 2, and approximately 100,000 NVIDIA GB200 chips are currently operational. The company hopes to deploy another 200,000 chips in the coming months. Musk stated last summer that he hoped Colossus 2 would ultimately have 550,000 chips, but he has also separately expressed a desire for the site to have 1 million chips.

High Equity Ratio Highlights Risks

While other companies, including cloud service provider CoreWeave, have also raised billions of dollars backed by debt secured by NVIDIA chips, most of these deals have leasing contracts supported by large profitable companies like Microsoft The transaction led by Valor will become the largest chip collateral deal to date, with added complexity.

Valor itself is an investor in xAI, and if xAI fails to pay the lease fees or wishes to purchase the chips at the end of the lease term, the company may find itself in an awkward position. Since these chips will be installed in the data centers owned by xAI, it remains unclear whether the SPV can easily find other buyers, and the cost of relocating the chips is high.

The equity stake in this transaction is close to 40%, significantly higher than the 10% to 20% equity stakes seen in recent data center deals. This provides lenders with considerable buffer space in case of xAI's default, but if xAI ultimately purchases the chips, it will increase the transaction costs. A person who heard the early pitch indicated that lenders were told the equity stake in the deal could be as high as 50%.

In contrast, Meta Platforms is raising $3 billion in equity and $26 billion in debt for its data center being built in Louisiana, covering the entire data center rather than just the chips. According to informed sources, the chip deal led by Valor aims to reduce xAI's overall financing costs.

Joint Venture to Build Gas Power Plant

To power Colossus 2, xAI relies on another partner.

In April of this year, the company formed a joint venture with Texas-based Solaris Energy Infrastructure, which leases gas turbines to data centers and oil and gas companies. According to securities documents, a limited liability company associated with xAI owns a 49.9% stake in the joint venture named Stateline Power, while Solaris holds 50.1%.

A subsidiary of xAI injected $86 million in cash into the joint venture, while Solaris contributed $86.4 million. Stateline secured a floating-rate term loan of up to $550 million, with the current interest rate around 10.25%.

Stateline is installing turbines at a site owned by a subsidiary of xAI in northern Mississippi, about a mile from Colossus 2 in Memphis. Securities documents indicate that through direct leasing and Stateline, Solaris expects to provide xAI with a total of over 1 gigawatt of power by early 2027.

Securities documents show that Stateline has ordered at least 66 turbines, with procurement commitments valued at $450.4 million. During a visit to the Mississippi site in September, at least 7 turbines were already operational