“Pricing at these levels implies near or above a 50% probability of default over five years, up from below 30% a year ago,” Biemann wrote.
Biemann pointed to Lehman Brothers as an example of CDS working as an early warning. Lehman’s CDS averaged less than 100 basis points in the third quarter of 2007 and topped 1,400 by mid-September 2008, when it filed for bankruptcy and rocked global markets.
Biemann said investors can view CDS today “as warning lights rather than countdown clocks.”
In other words, AI firms aren’t necessarily headed the Lehman way. Besides, activity in CDS tied to the large AI leaders looks more like hedging than positioning for a crisis.
Large AI leaders with strong cash flow pay 50 to 120 basis points for five-year protection, Biemann said. He said these levels “still look more like the price of portfolio insurance than a prediction of financial distress.”
Some established infrastructure borrowers have climbed toward 300 basis points. Protection on the broad investment grade market remains comparatively contained. “The concern is confined to business models that require debt markets to remain open while spending stays high and cash flow remains limited,” he said.
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