Nvidia’s Proposed $250 Billion OpenAI Lease Guarantee, $350 Billion GPU Financing Revive ‘AI Circular Finance’ Concerns

"Guarantees on $250 billion of data-center leases, financing for $350 billion of GPU purchases"

SK project valued at $500 billion also draws renewed scrutiny over ‘AI circular finance’

Nvidia Corp.’s discussions around providing massive financial backing to OpenAI are again stirring market concerns over so-called AI circular finance. Worries deepened after reports that Nvidia is considering guarantees tied to $250 billion of OpenAI’s data-center lease obligations, even as the ChatGPT maker continues to post heavy losses.

AI skeptics have for years argued that Nvidia’s investments in AI companies such as OpenAI and Anthropic, along with data-center-related firms including CoreWeave and Nebius, artificially inflate industry demand and company valuations.

Nvidia is discussing a proposal to guarantee as much as $250 billion in lease payments for a 10-gigawatt data center that SoftBank Group Corp. is building in Ohio for OpenAI, the Wall Street Journal and Bloomberg reported on July 27. The company is also weighing $350 billion in financing to help OpenAI buy Nvidia GPUs.

The talks are at an early stage and could still fall apart or see their financing terms changed, the reports said, citing people familiar with the matter.

Billy Leung, an investment strategist at Global X Management, said Nvidia’s willingness to provide additional guarantees on OpenAI’s data-center debt points both to demand for AI infrastructure and to the company’s funding strains.

Backing from Nvidia could help ease creditor concerns about lending to an unprofitable company that needs ever more computing capacity. It could also add to Nvidia’s own burdens.

Much of SoftBank’s upside hinges on a higher OpenAI valuation and the prospect of a large future initial public offering. SoftBank has agreed to invest about $65 billion in OpenAI by October and signed a $40 billion bridge loan to help fund that commitment, one of the largest such deals in Asia-Pacific history. Even so, SoftBank investors have grown more uneasy as the company expands its exposure to OpenAI, where its control over management remains limited.

Investors are particularly focused on a structure in which Nvidia lends money to OpenAI and other companies, and that funding is then used to buy Nvidia chips. For Nvidia, loans, financial investments and equity stakes can all translate into stronger GPU demand. Investors argue, however, that demand could be overstated if AI companies are buying GPUs with Nvidia-backed financing rather than their own cash.

Critics including Michael Burry have said the arrangements are circular because companies Nvidia finances or invests in typically end up buying or using Nvidia chips. They argue such deals could magnify losses if demand for artificial intelligence fails to live up to lofty expectations.

Nvidia last Friday also announced a $500 billion AI project with SK Group.

Working with SK Group, the parent of SK Hynix Inc., Nvidia said it plans to build more than 2 gigawatts of AI data-center capacity in South Korea. Chief Executive Officer Jensen Huang said the $500 billion figure includes both Nvidia’s purchases of high-bandwidth memory from SK Hynix and SK Group’s purchases of Nvidia GPUs and supercomputers. In other words, it reflects transaction volume over an extended period, not an upfront cash investment.

Nvidia has also agreed to invest $1 billion in Naver Corp., which is building AI data centers. Those facilities will also use Nvidia’s AI computing hardware.

"This is Korea’s golden age," Huang said in an interview with Bloomberg TV. Korea has the potential to help the world build artificial-intelligence infrastructure, he added.

Nvidia has been active in acquisitions and investments across the ecosystem in recent years. It has taken stakes not only in developers such as OpenAI but also in companies including Marvell Technology Inc.

Huang has rejected claims that Nvidia’s dealings with major buyers of its chips are inherently circular. Referring in January to the company’s investment in CoreWeave, he dismissed the criticism, saying it accounted for only a very small portion of the money the company ultimately needed to raise.

Nvidia is not alone in offering financing or payment guarantees to prospective customers.

Alphabet Inc., Google’s parent, agreed to guarantee lease payments for five Anthropic data centers. That enabled Anthropic to secure about $35 billion in loans.

As such transactions bind AI companies more tightly together, critics say the industry has become vulnerable to a systemic shock.

One of the main concerns is the sector’s rising debt load. Since last year, many AI companies have increased borrowing to finance data centers and chip projects. OpenAI, SoftBank, CoreWeave, Nebius and Oracle Corp. are all using significant leverage. Even Google, Amazon.com Inc. and Meta Platforms Inc., which still generate strong cash flow, have issued large amounts of debt this year and reached unprecedented borrowing levels.

Kim Jung-a, guest reporter, Hankyung.com, kja@hankyung.com