- Circular deals in AI (e.g., OpenAI spending Microsoft money on Microsoft servers) are criticized but not inherently bad; they resemble commodity market financing.
- AI compute is becoming a fungible commodity like electricity, with GPUs and data centers being resellable to others if not needed.
- Circular deals help finance capital-intensive AI infrastructure through off-take agreements, equity stakes, and guaranteed customers, similar to oil and critical minerals deals.
- Examples include Nvidia backing CoreWeave, SpaceX leasing data centers at premium, and Google backstopping TeraWulf bonds via Fluidstack and Anthropic.
- Risks include overextension by lenders, off-balance-sheet debt, and potential for risky securitization akin to 2007 mortgage-backed securities.
- The AI debt market could grow to $7 trillion by 2029, becoming the second largest asset-backed debt market after US mortgages.