A company that has revenues and is extremely well-capitalized gets debt finance. That is not news. That is totally commonplace. "Shouldn't all their capital come from investors?" No. Companies at all stages typically use a mixture of debt and equity finance.
His EV calculation is completely flawed also. Debt finance is typically senior to equity in recovery at bankruptcy, so when JPMC do this analysis (and believe me they did this analysis) they are not assuming 0% recovery. They are thinking it is most likely in a bankruptcy that they get some x>0% recovery.
Finally, banks don't think about their relationship with a multi-billion-dollar company in terms of the ROI on a single revolving credit. (even though this will in all likelihood be very profitable for JPMC). They think about how giving this revolving credit makes it more likely they get advisory on any future bond issuance and I-banking work when OpenAI want to do takeovers, and a foot in the door at IPO time etc.
Yeah, I thought it was weird right away too, but brush it off as a tech blog... but then I realized it's actually a finance website. Ruins the credibility of the website instantly.
The $4B revolver will likely sit undrawn. When it gets drawn, there usually a specific plan to reduce it back to zero. It's not for building data centres, a revolver typically used just for timing differences like a credit card is used (and the lenders will be paying attention). Also, when things get bad, there are covenant triggers which would allow lenders to renegotiate.
The other part is that it's a revolver, not a bond.You only pay what you use. It's not uncommon in VC. If you need to buy stuff now but your next round is in 2 months the revolver saves your ass. And once you raise you pay it back.
Agreed. Crucially, it doesn’t ask _why_ they want this line of credit and assumes it’s to serve as an equal source of financing as capital investment. Yet, I think the reason for this credit line is rather straight-forward risk management: it is not at all inconceivable that any one of the numerous legal proceedings the firm is already entangled in (to say nothing of ones surely to come) conclude in settlements that would be existential without it. If I were an OpenAI investor, I would certainly want a story for how they would handle such an expected emergency. A few other high-growth startups are publicly known to have obtained such a line of credit at a similar stage.
I'm going to paraphrase Matt Levine here -- the central trick of bankers is to divide debt into tranches of claims of different seniority, with different rates of return. Debt is a way to borrow money from investors where they actually have a generally low rate of return specified and have a senior claim on being paid back in the case of insolvency. Stocks are a way to borrow money for investors where they get basically _nothing_ in the case of insolvency, but they expect a higher return from either dividends or stock buy backs, or just from company growth. Different investors have different goals in terms of risk/reward for what they want out of a company they invest in, and providing investors more options unlocks more opportunities to raise money.
1) If OpenAI goes bankrupt, JPMC will get more than 0 on their loan. For some reason I have yet to comprehend, when I was sitting on a credit desk pricing CDS, they always used 40% as the recovery rate. I ran into a credit guy who taught finance at two very famous universities, and he also immediately said 40%, with no explanation.
2) It's a revolver, it's not all being used
3) If things go great and OpenAI ends up buying smaller guys or getting bought out (probably MSFT?) then JPMC will be right in there with those young bankers who don't sleep. They will pull in many many millions in fees with very little expense.
4) If things don't go great, OpenAI will be looking for more financing. Guess who will help them?
5) It's really only in case there's an Enron things are terrible for JPMC. Like if it turns out the whole thing was a bunch of guys in India answering every ChatGPT query, something like that. If there's actually an AI business, and despite JPMC's history of due diligence misses (Javice case) that's probably the case, then there's deals to be done.
The 40% historical recovery rate comes from a long line of companies that actually built things and produced products, often in factories with equipment in them... and a warehouse full of product that didn't sell at full price.
If OpenAI folds, there are two basic scenarios:
- one: the LLM crash has come, and OpenAI barely has any material assets. Microsoft isn't putting more money into it, and they won't take it over -- people with seven figure salaries will be looking for six-figure jobs.
- two: somehow, only OpenAI crashes, and the rest of the LLM boom continues. This likely involves OpenAI being extraordinarily outcompeted, so it's a long slow decline as contracts run out and are not renewed. 40% is probably high, but if JPM can retract the revolving debt before it all goes out the door, not ridiculously high.
> the LLM crash has come, and OpenAI barely has any material assets
They have claims on the use of assets via their leases.
More directly, if AI crashes in the next 2 years, they get bailed out. Between OBBA, tariffs and immigration enforcement, the American economy less AI is probably already in a recession. Trump and the GOP would get desperate if the political leash the AI boom has granted them is shortened. Borrowing another few trillion dollars to fix it would be worth the gamble.
> If OpenAI goes bankrupt, JPMC will get more than 0 on their loan.
Depends what other creditors OpenAI has, and the priority on their claims.
>For some reason I have yet to comprehend, when I was sitting on a credit desk pricing CDS, they always used 40% as the recovery rate.
That doesn't mean its the actual amount they will recover, just that it is sonething like the expected average for a large class given the criteria JPMC uses when entering such a position and the anticipated range and distribution of outcomes when those firms fail.
This, and thanks to certain loopholes in the U.S., it is possible that JPMC may receive nothing at all. Depending on the jurisdiction, companies have been known to sell off all assets for near zero and eventually leave creditors and investors on the hook.
The problem with recovery rates is that they different by orders of magnitude across different borrowers and credit products (for example car loans are around 70%, industrials are a bit loweer at 40%-50%, and high yield credit cards are single digits) so if you have a random sample of credit products in a portfolio it will approximate 40%. What generally happens is that the bank will sell it off to a specialist distressed investor long before the bankruptcy event so 40% is both wrong and not a horrible number to go by.
If Softbank buys OpenAI, they don't just sign a contract and send a cheque. They need powerpoint slides from JPMC to make the deal happen, and that costs money.
As we've seen from the NVidia/Oracle and AMD deals, there is more than one way to structure investments. Financing doesn't just mean "deposit cash into my bank account:.
> 3) If things go great and OpenAI ends up buying smaller guys or getting bought out (probably MSFT?) then JPMC will be right in there with those young bankers who don't sleep. They will pull in many many millions in fees with very little expense.
Which is exactly the same argument that the author made, no?
> Cost: $1,000
Case 1 (90%): OpenAI goes bankrupt. Return: $0
Case 2 (9%): OpenAI becomes a big successful company and goes 10x. Return: $1,000 + 5% interest = $1,050
Case 3 (1%): OpenAI becomes the big new thing and goes 100x. Return: $1,000 + 5% interest = $1,050
The actual math is that if OpenAI succeeds, then there's a nod and a wink that JPM will land the lead role in the IPO or any mergers/acquisitions, which translates into huge fees.
a company with 800 million weekly active users, and only losing $10B-$15B before implementing ads - which IMO is coming fast and soon to the LLM world - i would never calculate a 90% chance their shares end up at $0 before an exit option
This is the easiest money and best relationship JPM could imagine
Also, if OpenAI goes bankrupt, you _much_ prefer to have loaned them money to having bought shares in the company. People who own shares in a bankruptcy only recover anything after all the people that loaned them money are paid back in full.
I’m pretty sure the banks view the intellectual property value as the security for their loan not the potential profits of the company.
I’ve worked for enough startups that even if your company folds and goes bankrupt with no business plan the ip generally can easily cover the outstanding loans.
I think that's got to be highly variable. I've worked for a couple of startups that went under and the IP had basically zero value. Who is going to pay for a failed implementation of a failed idea?
> I’m pretty sure the banks view the intellectual property value as the security for their loan not the potential profits
Naa that takes too long to get any value from. If openAI goes pop, their IP isn't going to be worth much, because it'll die from competition, or the economy going to shit.
Like he said Microsoft is the most likely person to want to acquire the IP and employees. Amazon could be a potential second. Google paid 2.4b to license Windsurfs technology, OpenAI would go for far more.
That was one of the key parts of Silicon Valley Bank's business model. And that part worked pretty well: their collapse was caused by mismanaging interest rate risk and they never took many losses on loan defaults.
At this point I would rather consider this kind of large loans to be "political" than "technical", that is say, they may or may not make sense in terms of $$$, but may make a lot of sense in other areas.
> This Reuters article claims OpenAI is going to generate $3.6 billion in revenue this year, but the costs will lead to a loss of more than $5 billion. It expects a major revenue jump next year to $11.6 billion
The article linked[0] is from last year.
A recent article[1] from this year says "OpenAI looks to meet its full-year revenue target of $13 billion and a cash-burn target of $8.5 billion, the report added."
Yeah, this is a pretty major error. They already have a higher revenue than the article's quoted "jump next year" (which was this year and was an underestimate).
Don't worry, people in the thread are now going to pivot to "Uhh, those numbers don't matter! Here's an opinion from some tech blog about the financials of a private company!"
The doomerism on OpenAI finances is unfounded IMO. They will survive and be a large company at this point. The big question marks are on just how big, when, and the cost to get there. If they lost all financing tomorrow, they'd deploy a cheaper model and slow down research. I don't have a hard time imagining that they could pull off a 75% reduction in costs in such a scenario.
No one is OpenAI’s financing while anthropic et al. keep raising. The big risk is that future innovation fails to live up to the hype and they can't afford full priced GPUs or the proposed datacenters.
They've made 8 billion this year with 800 million users, or $10 ARPU (average revenue per user). They have committed to spend a trillion dollars over the next 5 years. I'll call it $200 billion/year, with a (rounded-up) billion active users, they would need to make $200 ARPU . For comparison Meta has about $50 ARPU. I'm having a harder time finding Google's ARPU, but with $350 billion in revenue last year if they made $200 ARPU they would have less than 2 billion users (I can't find how many user's they actually have but I would bet money it's a lot more). They would have to be making 3-4x more money per user than two of the largest companies in the world for this bet to work out.
I don't see how this is going to work out for them.
I'd doubt that they intend to spend a full trillion. The spend commitment is such that no one else can plausibly outspend them. If you take the position that spend is correlated with outcome - then they are on a positive track to win. The existence of this spend commitment will motivate some market players to exit the market.
Readit News
A company that has revenues and is extremely well-capitalized gets debt finance. That is not news. That is totally commonplace. "Shouldn't all their capital come from investors?" No. Companies at all stages typically use a mixture of debt and equity finance.
His EV calculation is completely flawed also. Debt finance is typically senior to equity in recovery at bankruptcy, so when JPMC do this analysis (and believe me they did this analysis) they are not assuming 0% recovery. They are thinking it is most likely in a bankruptcy that they get some x>0% recovery.
Finally, banks don't think about their relationship with a multi-billion-dollar company in terms of the ROI on a single revolving credit. (even though this will in all likelihood be very profitable for JPMC). They think about how giving this revolving credit makes it more likely they get advisory on any future bond issuance and I-banking work when OpenAI want to do takeovers, and a foot in the door at IPO time etc.
The $4B revolver will likely sit undrawn. When it gets drawn, there usually a specific plan to reduce it back to zero. It's not for building data centres, a revolver typically used just for timing differences like a credit card is used (and the lenders will be paying attention). Also, when things get bad, there are covenant triggers which would allow lenders to renegotiate.
> OpenAI is going to generate $3.6 billion in revenue this year, but the costs will lead to a loss of more than $5 billion.
We know that actually:
> OpenAI generated around $4.3 billion in revenue in the first half of 2025... OpenAI said it burned $2.5 billion
> OpenAI looks to meet its full-year revenue target of $13 billion and a cash-burn target of $8.5 billion, the report added.
https://www.reuters.com/technology/openais-first-half-revenu...
This Forbes article has a good overview: https://www.forbes.com/sites/amyfeldman/2023/03/19/silicon-v...
Debt is almost always cheaper than equity. Particularly if you can collateralise.
Well-capitalized companies rejecting debt is more of a Silicon Valley outlier in the global economy. (It likely stems from dot-com trauma.)
https://www.seattletimes.com/business/amazon-pays-off-its-hi...
I think we're well beyond the point where OpenAI can be called a "startup."
Dead Comment
2) It's a revolver, it's not all being used
3) If things go great and OpenAI ends up buying smaller guys or getting bought out (probably MSFT?) then JPMC will be right in there with those young bankers who don't sleep. They will pull in many many millions in fees with very little expense.
4) If things don't go great, OpenAI will be looking for more financing. Guess who will help them?
5) It's really only in case there's an Enron things are terrible for JPMC. Like if it turns out the whole thing was a bunch of guys in India answering every ChatGPT query, something like that. If there's actually an AI business, and despite JPMC's history of due diligence misses (Javice case) that's probably the case, then there's deals to be done.
If OpenAI folds, there are two basic scenarios:
- one: the LLM crash has come, and OpenAI barely has any material assets. Microsoft isn't putting more money into it, and they won't take it over -- people with seven figure salaries will be looking for six-figure jobs.
- two: somehow, only OpenAI crashes, and the rest of the LLM boom continues. This likely involves OpenAI being extraordinarily outcompeted, so it's a long slow decline as contracts run out and are not renewed. 40% is probably high, but if JPM can retract the revolving debt before it all goes out the door, not ridiculously high.
They have claims on the use of assets via their leases.
More directly, if AI crashes in the next 2 years, they get bailed out. Between OBBA, tariffs and immigration enforcement, the American economy less AI is probably already in a recession. Trump and the GOP would get desperate if the political leash the AI boom has granted them is shortened. Borrowing another few trillion dollars to fix it would be worth the gamble.
Depends what other creditors OpenAI has, and the priority on their claims.
>For some reason I have yet to comprehend, when I was sitting on a credit desk pricing CDS, they always used 40% as the recovery rate.
That doesn't mean its the actual amount they will recover, just that it is sonething like the expected average for a large class given the criteria JPMC uses when entering such a position and the anticipated range and distribution of outcomes when those firms fail.
Who? I can only think of the Saudis/UAE and SoftBank.
As we've seen from the NVidia/Oracle and AMD deals, there is more than one way to structure investments. Financing doesn't just mean "deposit cash into my bank account:.
Which is exactly the same argument that the author made, no?
This means the number is wrong.
> Cost: $1,000 Case 1 (90%): OpenAI goes bankrupt. Return: $0 Case 2 (9%): OpenAI becomes a big successful company and goes 10x. Return: $1,000 + 5% interest = $1,050 Case 3 (1%): OpenAI becomes the big new thing and goes 100x. Return: $1,000 + 5% interest = $1,050
The actual math is that if OpenAI succeeds, then there's a nod and a wink that JPM will land the lead role in the IPO or any mergers/acquisitions, which translates into huge fees.
This isn't a financial transaction. This is a "relationship" transaction.
This is the easiest money and best relationship JPM could imagine
Wow, that's slightly more than Yahoo has. Well, had.
Deleted Comment
I’ve worked for enough startups that even if your company folds and goes bankrupt with no business plan the ip generally can easily cover the outstanding loans.
Naa that takes too long to get any value from. If openAI goes pop, their IP isn't going to be worth much, because it'll die from competition, or the economy going to shit.
The article linked[0] is from last year.
A recent article[1] from this year says "OpenAI looks to meet its full-year revenue target of $13 billion and a cash-burn target of $8.5 billion, the report added."
[0]https://www.reuters.com/technology/artificial-intelligence/o...
[1] https://www.reuters.com/technology/openais-first-half-revenu...
No one is OpenAI’s financing while anthropic et al. keep raising. The big risk is that future innovation fails to live up to the hype and they can't afford full priced GPUs or the proposed datacenters.
They've made 8 billion this year with 800 million users, or $10 ARPU (average revenue per user). They have committed to spend a trillion dollars over the next 5 years. I'll call it $200 billion/year, with a (rounded-up) billion active users, they would need to make $200 ARPU . For comparison Meta has about $50 ARPU. I'm having a harder time finding Google's ARPU, but with $350 billion in revenue last year if they made $200 ARPU they would have less than 2 billion users (I can't find how many user's they actually have but I would bet money it's a lot more). They would have to be making 3-4x more money per user than two of the largest companies in the world for this bet to work out.
I don't see how this is going to work out for them.
The loan value in case OpenAI goes bankrupt depends on the details of the deal.