Bond Investors Are Wary of SpaceX's Borrowing Binge to Buy Nvidia Chips

Space Exploration Technologies (NASDAQ: SPCX), better known as SpaceX, is planning to take on another $40 billion in debt, and investors don't like it. At all.

How do I know that?

Because the price of credit default swaps on SpaceX debt is soaring. Credit default swaps (CDSs) are a type of insurance policy that debt investors can purchase to protect against the risk of default on debt instruments. At the beginning of June, the CDS price to protect $1 million of SpaceX debt against default cost $11,000. That's per year. Today, the same CDS costs $19,400, a 76% increase.

That dramatic price increase means CDS providers are demanding much higher premiums to insure SpaceX debt because they see a rising risk of default.

SpaceX is seeking to borrow $40 billion -- $30 billion via bond issuance and another $10 billion from banks -- to buy chips from Nvidia (NASDAQ: NVDA). That new borrowing is on top of the $39.4 billion in debt and finance leases SpaceX had at the end of June. So the new borrowing would essentially double the company's debt.

SpaceX is borrowing despite sitting on an enormous pile of cash

Oddly, the space technology and AI company led by Elon Musk had $100 billion in cash equivalents and marketable securities on hand at the end of June, the result of its $86 billion initial public offering earlier that month and $25 billion in bond issuance. But SpaceX is burning through that cash so quickly -- much of it on AI computing infrastructure -- that the company clearly sees the need to borrow more. And new debt financing that closes in 2027 would be timely for the company.

Of course, SpaceX is hardly the only AI company borrowing heavily to fund data centers and other AI infrastructure. Capital expenditures by so-called hyperscalers are expected to reach up to $800 billion this year and $1.2 trillion in 2027, a larger share of GDP than any technological investment cycle since the railroad build-out of the 1800s. That borrowing is expected to grow to $1.4 trillion in 2028. The massive spending spree exceeds these companies' cash flow from operations, so they need to raise enormous amounts in debt and equity markets.

But many investors and analysts are skeptical that SpaceX will be a major provider of AI or compete with the other hyperscalers in that area. Thus, the soaring price of insurance to protect against a SpaceX default.

SpaceX priced its IPO shares at $135 when it went public on June 12. After spiking above $200 in initial trading, shares are now trading around $162.

Image source: Getty Images.

Musk certainly has grandiose dreams, as articulated in the SpaceX IPO registration, including "to make life multiplanetary," "to understand the true nature of the universe," and "to extend the light of consciousness to the stars." Also, "to harness the Sun to power a truth-seeking artificial intelligence that advances scientific discovery, and ultimately to build a base on the Moon and cities on other planets."

You might have to believe in Musk's dreams to invest in SpaceX's bonds or stock.

Matthew Benjamin has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.