What's ahead for AI financing after Nvidia CEO Jensen Huang departs

Nvidia CEO Jensen Huang's departure hasn't produced a broad shock to the credit market, but it is putting the company's role as a financier of artificial intelligence infrastructure under scrutiny.

Huang, who stepped down Thursday amid an espionage and adultery scandal, built Nvidia into an AI powerhouse in the 33 years since he co-founded the company. Chief financial officer Colette Kress has been named interim CEO as the company searches for a permanent chief executive.

Nvidia not only supplies its graphics processing units to hyperscalers and tech giants, it also provides financing to other companies to help the industry expand. That could all change.

"Although we expect the company to fulfill all of its previously announced commitments, we believe that going forward, it may be more difficult for the company to negotiate new multi-party investments among ecosystem partners at the same scale it has done up to this point," Goldman Sachs analyst James Schneider said in a note Thursday.

The news of Huang's resignation comes after investors were already concerned about the massive amount of debt being taken on to fund AI infrastructure.

Tech bond yields have risen and spreads have widened on credit default swaps, most notably in lower-rated names. Credit default swaps are contracts in which investors pay for protection in case the borrower can't repay its debt. Wider spreads indicate investors view the bonds as riskier.

On Friday, the yield on Nvidia's 4.5% bond due in 2031 sat at 5.77%, nearly 6% higher week to date. Bond yields move inversely to prices.

Tech stocks slumped Thursday with the Nasdaq 100 closing down 0.3% as markets digested the Nvidia news. Yields on hyperscaler bonds ticked slightly higher on Thursday, signaling the broader concern about AI debt lingers.

Neocloud exposure

It's the smaller AI companies that could ultimately see an impact if Nvidia makes any changes to its AI financing. The company had $36 billion in off-balance-sheet AI cloud agreements, or backstops, for neoclouds, according to its last quarterly financial filing in July.

Neoclouds CoreWeave, Nebius and IREN are all in Nvidia's portfolio. Their shares were down sharply Thursday.

CoreWeave, which has become the poster child for AI debt fears, saw its bond yields retreat after its quarterly earnings on Tuesday eased investor concerns. The yield on its 9.75% bond due in 2031 was 14.75% on Friday after climbing to 16.7% last week. The spread on its five-year CDS also dropped 18% week to date, although it remained above 1,000 — which is generally considered a sign of distress.

It remains unclear how Nvidia's support for those companies may change, said CreditSights analyst Andy Li.

"We don't know what the ultimate strategy for Nvidia is going to be coming out the other side," he said.

"However, I think directionally, just given the fact that Jensen was so crucial in selling the Nvidia story and being a very aggressive deal maker, it's likely that a lot of this creative deal-making and circular financing and equity and credit support is going to moderate," he added.

CoreWeave CEO Michael Intrator told CNBC Wednesday, before Huang's departure, that Nvidia "is not one person."

"There are thousands of people over there that interface with thousands of people at my company every day. They integrate on the technology. They integrate on the physical infrastructure. They integrate on the networking," he said in an interview with "Squawk on the Street." "They have been a great partner for us for years. They will continue to be a great partner for us."

Bob Lang, founder and chief strategist at Explosive Options, doesn't see any big changes in terms of Nvidia's relevance or its ability to finance for now. As CFO, Kress was involved in the financing deals, and the search for a permanent CEO is going to take some time, he noted.

The real issue is just how much money the company will want to lend for AI financing, rather than, say using its hundreds of billions in free cash flow for other purposes, like share buybacks, capex, or acquisitions.

"Big companies like Nvidia and Meta, they're holding all the cards," he said. "When they decide that the game is over, that's it — it's going to be curtains for some of these smaller companies."