Ed Ziron wrote an article titled The Subprime Data Center Crisis (22 July 2026).
The first part of the article is a recap of how collateralized debt obligations (CDOs) worked in the mortgage bubble that popped in 2008. Skipping ahead…
« Data Center SPVs are the AI Bubble’s CDOs »
« I’m going to generalize here, because each of these deals has weird little unique terms that make them, well, more dangerous.
- When somebody decides to build an AI data center, they form a special purpose vehicle (much like a CDO), which then raises debt, in some cases slices it into tranches and, in most cases, sells them to institutional investors, asset managers or banks.
- Think of the SPV as its own little company (owned by the holding company, CoreWeave for example), and when somebody signs a contract with an AI data center company (say, OpenAI), they actually are signing a deal with the SPV rather than the company itself.
- When the SPV receives the funds from the debt raise, it makes payments to contractors and suppliers (EG: NVIDIA for GPUs), and receives the revenue from the customer contract, assuming said customer is paying (or has anything to pay for).
- During construction (IE: pre-revenue), interest payments are taken out of the SPV from a pre-funded interest reserve account.
- When a customer pays, the SPV uses those funds to pay for the operating expenses of the data center, then creditors (based on their seniority in the debt), then, if anything’s left, the holding company. All of this money counts as revenue.
- These SPV-based data center debt deals also have a few fun little features:
- A DSCR (Debt Service Coverage Ratio) which means that the SPV must bring in a certain amount of EBITDA income compared to its debt. For example, if an SPV’s debt had a DSCR of 1.15x and a monthly payment of $1.5 million, it needs to bring in $1.725 million in revenue after paying its operating expenses.
- These often don’t begin until a date when the data center is theoretically operational, and yes, this absolutely could go horribly wrong with the amount of delays there are.
- A minimum liquidity requirement that, when breached, requires the holder to refill it or face default.
- A Debt Service Reserve Account (DSRA) set up after construction as a buffer if payments fall through. »
- A DSCR (Debt Service Coverage Ratio) which means that the SPV must bring in a certain amount of EBITDA income compared to its debt. For example, if an SPV’s debt had a DSCR of 1.15x and a monthly payment of $1.5 million, it needs to bring in $1.725 million in revenue after paying its operating expenses.
«Put simply, every time somebody builds a data center, they form a completely separate entity that owns the chips, owns the debt, and, in many cases, owns most of the risk. These SPVs only pay out to their creditors in the event that customer revenue flows in, which means that they are dependent both on the speed of construction of said data centers and their customers’ ability to pay. »
«CoreWeave is the main offender… with a different SPV for each of its Direct Draw Term Loans (DDTLs), most of them non-recourse, meaning that if their customers fail to pay, investors get screwed to varying degrees based on their seniority in the debt, and CoreWeave’s assets can’t be pursued in court, though it is on the hook for the payments on the debt. »
«CoreWeave’s $8.5 billion DDTL 4.0 loan was raised using its contract with Meta and the underlying data center assets as collateral with funding coming from banks like MUFG, Deutsche Bank, and US Bank, with funds being deposited into an SPV called CoreWeave Compute Acquisition Co VIII LLC, with another filing showing that the funding would be used to lease space from Applied Digital in Ellendale, North Dakota and fill it full of GPUs and provided to an “investment-grade customer” that Wells Fargo believes is Meta. »
« Similarly, CoreWeave raised its $2.6 billion DDTL 3.0 loan last year to “accelerate delivery of services from OpenAI,” funding two different SPVs called CoreWeave Compute Acquisition Co. V and VII, LLC. that, in turn, signed a deal to provide compute to OpenAI through the main CoreWeave entity. »
«How Hyperscalers Hide Data Center Spending Obligations from Investors »
« Nikkei Asia reported this week that Meta, Google, Amazon, Microsoft and Oracle have accrued around $1.65 trillion in outstanding debt in the last five years, with an additional hundreds of billions of dollars’ worth of “off balance sheet” debt, meaning that the corporate structure allows the company to not include it as part of its liabilities. »
«BlackRock is currently raising $12 billion to build a data center for Meta, which in practical terms means BlackRock has invested in and is raising debt for a holding company called “Project Sopaipilla Holdings,” of which it owns 80% and Meta owns 20%. This holding company will then buy NVIDIA GPUs and pay construction firms to build the data center, and Meta’s (theoretical) payments will be used to pay down the debt. »
«Despite the fact that Meta will (theoretically) own and operate as the exclusive tenant of this data center, the actual debt — $12 billion or more! — won’t appear on its balance sheet, much like its $27 billion Hyperion Data Center that belongs to an SPV called Beignet Investor LLC which is 80% owned by Blue Owl, 20% owned by Meta, and funded using bond sales to PIMCO and BlackRock. »
«The problem with these SPV-based deals is that they allow companies to, at least on a balance sheet basis, hide the scale of their debts. »
« This is all legal, worrying, and yes, a little bit Enron. »
« Alphabet Inc. and Meta Platforms Inc. each have turned to vehicles known as variable interest entities (VIEs) as part of the financing mix needed to construct data centers and related energy infrastructure. »«Meta, the parent of Facebook, last year formed a joint venture, a VIE, to build a Louisiana data center through a partnership with Blue Owl Capital. The social media titan’s maximum exposure for the venture is $46 billion, according to its filings with the Securities and Exchange Commission. The company announced last week that it would expand its planned campus and is expected to spend as much as $250 billion on the project, Bloomberg News has reported. »
«To be clear, a Variable Interest Entity is a type of SPV where you have control over the entity, and you must consolidate it into your balance sheet… unless you are not considered the “primary beneficiary,” which Meta argues isn’t the case despite being the primary tenant and reason that Hyperion is being built. »
«Auditor Ernst & Young raised a “red flag” (per the WSJ) about this arrangement, flagging it as a “critical audit matter,” adding that it “…was especially challenging due to the significant judgment required in determining the activities that most significantly affect the VIE’s economic performance.” Nevertheless, it was approved, it happened, and everything is fine and normal. »
«What’s also important to note is that none of the money going into these SPVs counts as capital expenditures. For example, across the space of five quarters (Q1 2025 through Q1 2026), Meta spent around $88.6 billion in capital expenditures, but that doesn’t include any of the debt or purchases of GPUs or anything else done in its name as part of the Hyperion SPV, despite it having (per its own fillings) $45.95 billion of exposure. »
« To be clear, even “on balance sheet” obligations are off-balance-sheet until the leases begin. »
« AI compute demand does not exist at the scale that it needs to, will likely never reach that scale, and data center construction is a debt-funded asset bubble with ruinous consequences. »
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