AI costs are soaring: Meta raises another $12 billion, with borrowing costs rising significantly.

Author: Zhao Ying, Wall Street Insights

As tech giants continue their investment spree in AI infrastructure, the bond market is pricing in higher prices for this cash-burning race. Meta's latest $12 billion data center financing shows that investors' risk premium for AI-related debt is rising significantly, with borrowing costs much higher than the previous deal nine months ago.

On Friday, according to the Financial Times, citing sources familiar with the matter, the yield on this bond, led by BlackRock and used for a nearly 1-gigawatt data center project in El Paso, Texas, has exceeded 7% in the initial discussion phase. Some investors are demanding a risk premium that is about 0.4 percentage points higher than Meta's "Hyperion" data center deal completed last October. The sources added that pricing discussions are still in the early stages, and the issuance could officially begin as early as next Monday, with final terms potentially subject to change.

Rising borrowing costs reflect the bond market's growing wariness of the risks associated with AI financing.

Meanwhile, AI concept stocks have recently experienced a large-scale sell-off, and stock investors' doubts about the sustainability of this sector's boom continue to rise, creating a resonance between the sentiments of the two markets. Rising borrowing costs are prompting the market to reprice AI risks. The cost pressures of this financing have substantial implications for the bond market. A credit investor specializing in investment-grade debt stated: "When you issue hundreds of billions of dollars in bonds, even a 0.1 percentage point increase in costs translates to tens of millions of dollars more in interest payments annually, which has a very significant impact in high-rated markets." For reference, Meta's previous "Hyperion" project bond issuance, which completed a record-breaking $27 billion issuance last October, saw its bonds linked to the project, issued through a special purpose vehicle called "Beignet Investor," fall to approximately 96 cents face value this Thursday. Sources familiar with the matter pointed out that the increased borrowing costs directly reflect lenders' cautious attitude towards the company's continued expansion of its AI exposure—a caution that is intensifying following the recent borrowing spree among tech giants. Special Purpose Vehicle Structure: Tech Companies Keep Their Balance Sheets "Clean" This financing continues the structural design of Meta's previous transaction. The bonds will be issued through a special purpose vehicle called "Sopaipilla Investor"—a name derived from a popular South American fried pastry, similar to the previous "Beignet Investor" named after a Louisiana dessert. Sopaipilla will hold 80% of the Texas project, with Meta holding the remaining 20%. S&P analyst Viviane Gosselin stated that this transaction is "almost a carbon copy of the previous one." Borrowing through project entities rather than corporate entities has become a mainstream method for tech companies to raise funds in the AI ​​arms race while maintaining a clean balance sheet. Last month, Anthropic also completed a $35 billion financing round through a scheme backed by GPU leases and a Broadcom guarantee. The structure is robust, but certain risk clauses exist. Regarding the bond structure, Sopaipilla's bonds will mature in 2048, secured by Meta's 20-year lease payments starting in 2028. Meta has four renewal options every four years, with hefty penalties for early exit, providing strong protection for lenders. Furthermore, Meta assumes construction risk, bearing costs exceeding 105% of the initial budget. However, this structure also has limitations: the bonds are not directly pledged as tangible assets. S&P stated in its report that if the project suffers a serious unforeseen event resulting in a delay exceeding 18 months, Meta can terminate the lease without incurring any penalty. Regarding ratings, S&P rated the bonds A+, one notch below Meta's corporate rating of AA-. Gosselin stated, "From our perspective, this is a very robust structure." Fitch and KBRA rated the transaction AA-, consistent with Meta's corporate rating.