AI data centers are becoming a “stress test” for insurers as rapid technological advancements and the use of increasingly complex financial structures present a unique set of challenges and opportunities for the sector.

Global spending on data centers could reach $7 trillion by 2030, according to McKinsey, and much of that spending can no longer come solely from hyperscalers. Instead, Big Tech is increasingly tapping private equity, private credit and using debt to finance the capital-intensive build-out of the facilities.

Private infrastructure data center deals were consistently above the $10 billion mark last year, according to data from Preqin. The largest deal amounted to $40 billion, with Nvidia, Microsoft, BlackRock and Elon Musk’s xAI forming part of a consortium of investors to buy Aligned Data Centers.

The fact that so much money is tied up in building, constructing, and running data centers has been a “real stress test” over the last four to five years for the major insurance companies, Tom Harper, data center leader at insurance broker Gallagher, told CNBC.

“When you put $10 to $20 billion plus in a single location, it creates capacity issues in the marketplace. The marketplace has always had an appetite for these risks because they are such high-quality builds. They’ve got cutting-edge technology, they’re AA plus plus construction locations, but the capacity — the ability to provide the insurance capacity at these locations — has been tough.”

It was nearly impossible to reasonably insure a $20 billion campus in 2023, according to Harper. In 2026, however, it’s become a weekly conversation.

Estimated spending on AI data centers has been referred to as the biggest peacetime investment project in history. Rajat Rana, partner at Quinn Emanuel Urquhart & Sullivan, told CNBC he would take it a step further and stress that this is the “largest peacetime investment project in human history, which is financed largely off balance sheet.”

Rana, who worked on structured finance litigation in the wake of the housing crisis triggered by the 2008 Financial Crash, said tracking developments in AI data center financing feels like “deja vu.”

“We’re talking about trillions of dollars, and almost going back to the same cycle where there’s almost no transparency about the financing structures — the scale is astronomical,” he said.

The AI boom is not only driving a rush in demand for the facilities, it’s also spurring rapid advancements in power generation and chips — the critical tech that the data centers house. The advancements and huge sums of money flowing into the sector pose both risks and rewards for insurers and lenders.

The M&A boom is also keeping transactional lawyers busy, with Kirkland & Ellis noting that a number of companies are forming data center specific teams, enlisting specialists across real estate, power, telecom, finance, insurance, trade, private equity and cybersecurity.

Professional services firm Marsh launched a dedicated digital infrastructure advisory group designed to help clients as contracts become increasingly complex.

Last year, Marsh also launched Nimbus, a 1-billion-euro ($1.2 billion) insurance facility for covering the construction of data centers in the U.K. and Europe. Seven months later, it expanded the facility to offer limits of up to $2.7 billion.

“Private credit can meaningfully complement banks and can support non‑hyperscale contracted offtakes,” said Alex Wolfson, senior vice president of credit specialties at Marsh Risk.

As data center loans increase, insurers who protect lenders if a borrower doesn’t pay, are starting to hit limits, Wolfson explained. Marsh is working on solutions to support lenders.

However, Quinn Emanuel’s Rana cautioned that when it comes to data centers, it’s not easy for insurance companies to fully understand the risk as financing moves off the balance sheet.

He noted that in January, four U.S. senators called on the government to investigate how Big Tech is increasingly turning to “complex and opaque debt markets to borrow staggering sums of cash.” In an open letter, the senators warned that massive debt loads could cause “destabilizing losses” for financial institutions, triggering a broader financial crisis that harms the economy.

That increased opacity in financing can lead to second-order litigation risks for downstream investors such as pension funds, insurers and asset managers invested in private credit funds who later learn they were not fully aware of concentration risk, Rana said in a note published in March.

He told CNBC that some PE funds have reached out to him with concerns about commercial leases and the valuation of properties.

Tenants are trying to negotiate the extensions of their properties and landlords are disputing the value as they look for higher prices for AI data centers.

“I’m not a doomsday guy who’s saying, hey, it’s gonna crash. My point is, whether it crashes or not, the disputes are inevitable, and we have already seen those disputes,” Rana said.

A key debate around potential cracks in financing centers on GPUs and the risk that their lifecycles may not align with the longer lifespan of the facilities that house them.

CoreWeave, which sells AI tech in the cloud, is the first company to secure GPU-backed loans, essentially using the value of the high-performance chips as collateral. Last week, the company announced it secured $8.5 billion in a first investment-grade rated GPU-backed deal. Its stock jumped 12% on the day.

While data centers typically have a decades-long lifecycle, the average lifecycle of a GPU is around seven years.

“There are different data centers that are raising debt by disclosing different life cycles to investors,” said Rana. He referred to the problem as the “GPU debt treadmill,” a phrase coined by AI commentator Dave Friedman.

“This is almost like a treadmill that these AI data centers are running on,” Rana told CNBC. Even if the financing structure is ring-fenced and backed by an investment-grade counterparty, the real risk may lie in whether an equity issue today later evolves into a credit problem over time.

“As these new chips come in, the data centers will feel pressured to raise more debt, and then they will have to build new infrastructure, and then that basically creates a billion-dollar question: how fast can you build these facilities? How fast can you raise credit?”

The cost of funding these projects is likely to continue to fuel recent growth in asset-backed securitization deals, says Harper, with greater volumes of commercial mortgage-backed securities sold to investors.

For some insurers, like Gallagher, the changing dynamics in the sector are opportunities rather than challenges. Harper said the lifecycles of GPUs have been increasing. Where things have depreciated quickly, Gallagher has had to get creative and write bespoke insurance polices with a predetermined agreement on how to value the assets.

“It would be a nightmare with the size and scope of these [facilities] to determine [the value of] each individual unit,” he said.

Harper also stressed that GPUs are interchangeable. The firm has seen operators anticipate relatively short life cycles and construct facilities that are more modular in response.

“There is a core tension in data center project finance: lenders typically want asset lives that exceed loan tenors by a comfortable margin, and the shorter useful life of GPUs challenges that assumption,” said Marsh Risk’s Wolfson.

Lenders are therefore structuring loans more cautiously to protect themselves.

Deteriorating asset quality, collateral markdowns and a growing rush for the exits are rattling private credit markets and prompting comparisons to the Global Financial Crisis.

But a spike in loan defaults, while painful, could help shake out pockets of stress from the $3 trillion sector and provide what one industry pro calls a “healthy reset” after its first major liquidity test.

Ares Management on Tuesday opted to curb investor withdrawals from its $10.7 billion private credit fund, just a day after Apollo Global Management unveiled similar measures in one of its vehicles. Ares has capped redemptions in its Ares Strategic Income Fund at 5%, after withdrawal requests surged to 11.6%, according to a Bloomberg report.

Other managers, including Blue Owl Capital and Cliffwater, have also scrambled to halt or restrict withdrawals in recent weeks, as rising default fears spark an investor retreat from the sector.

Comparisons to the build-up to the 2008 Global Financial Crisis are now intensifying as concerns over underlying loan quality grow.

Morgan Stanley recently warned default rates in private credit direct lending could surge to 8%, well above the 2-2.5% historical average, with pressure concentrated in sectors vulnerable to AI disruption, such as software.

However, Morgan Stanley analysts led by strategist Joyce Jiang also said an 8% default spike would be “significant but not systemic,” pointing to lower leverage among private credit funds and business development companies compared with 2008.

So what would a default spike of that magnitude look like in practical terms?

“An 8% default rate takes private credit from a ‘zero loss’ fantasy to a more normal credit asset class — painful in spots, but ultimately a healthy reset that frees up capital for stronger businesses,” said Sunaina Sinha Haldea, global head of private capital advisory at Raymond James.

She said a normalization from ultra‑low defaults would be “painful for some funds” but “healthy for the asset class if it forces better underwriting and more realistic valuations.”

An 8% or 9% default rate would largely manifest through so-called “shadow defaults,” such as maturity extensions and covenant waivers, said William Barrett, managing partner at Reach Capital. Lenders use these “amend-and-pretend” tools to keep borrowers afloat and avoid immediate bankruptcy.

While payment-in-kind agreements delay cash returns, increase debt, and potentially signal greater stress in the system, they also act as an effective “release valve” that stabilizes companies and prevents outright failures, he added.

“For the real economy, this means capital becomes trapped in restructurings, leading to tighter future lending conditions,” Barrett told CNBC via email.

Concerns over credit quality have spread through private markets following the high-profile collapses of First Brands and Tricolor within the U.S. auto parts sector last year. While those failures were tied to asset-based finance and bank-syndicated debt, rather than traditional middle-market direct lending, they thrust the broader question of risky debt in private markets into the spotlight.

There were plenty of reasons for investors to be on edge in the current setup for stocks even before the U.S. and Israel launched a major military campaign against Iran over the weekend.

The month of February, and midterm election years in particular, have a history of being bad for stocks. The cash drain among the mega-cap tech stocks that have led the market for years has been stressing heady market valuations, with Amazon headed back to a negative free cash flow situation and Alphabet dipping deeply into the bond market to finance its data center buildout — and it is far from alone in seeking debt market financing related to AI. The threat from AI to sectors across the market was walloping companies from software to trucking to commercial real estate as new worst-case scenarios were theorized on an almost daily basis.

All of that resulted in an S&P 500 that has gone nowhere this year, with a return of less than one-half of one percent for an index that is likely to see more volatility in the week ahead. But after three years of gains — and even before the uncertainty of a prolonged war in the Middle East and the prospect of $100 oil tipping the global economy into recession — a few months of sideways trading was not a shock to investors. They have been increasingly moving away from bonds as the primary hedge against the stock market and it’s not just gold, up another 20% this year, that has boomed. Investors have been turning to options-based exchange-traded funds in increasing numbers over the past few years as a result of fears about the sustainability of the stock market’s run combined with the need to generate income among many older Americans.

According to ETF Action founding partner Mike Akins, one of the most notable splits in the ETF world is between the heavy use of “the big box categories,” core stock and bond index funds, by institutional investors — where as much as 60-70% of ownership is institutional — versus the ownership of “non-traditional” ETFs in areas that have now grown to include many options-based ETF strategies and has been one of the biggest product development trends in recent years. There has been an estimated $170 billion invested in “synthetic income” ETFs which use options to focus on generating income, and $100 billion in “buffer” ETFs that use options to focus on downside protection — with most of the assets coming from retail investors or investment advisors for their individual investor clients, Akins said on the most recent episode of CNBC’s “ETF Edge.”

According to Tidal Financial Group senior vice president of product development Aga Kuplinska, the market is in the “overlay everything” phase as issuers take any underlying asset class or strategy and layer on options for income and hedging. It’s no longer just in areas where the search for income has long been a focus, such as dividend stocks, but for areas of the market long associated more typically with the search for growth, like tech stocks. “Income has been the No. 1 selling point and will remain so going into future because the demand for yield just doesn’t go away and during uncertain market conditions the added benefit of income seems to resonate well with investors,” she said on “ETF Edge.”

While institutions have long used similar strategies, the availability of the options-based strategies in an ETF wrapper has made it more efficient for retail investors to access this approach, and Akins warned that “in some respects, with synthetic income in particular, we’ve gotten to the Wild West in terms of what we can do.”

The ETF experts said there are successful examples of fund companies generating both maximum income for investors from these strategies and those generating a more conservative level of income. In the tech stock-concentrated Nasdaq 100 synonymous with the Invesco QQQ ETF (QQQ), for example, there are options-based ETFs that have performed well amid the tech tumult and have been a “nice solution for investors to generate income off a more volatile strategy while still getting upside,” Akins said.

Nevertheless, Kuplinska added that investors need to start from the understanding that “there is no free lunch in options income. The more income, the more upside you typically give up.”

Akins said that some of the yields on offer are so high investors need to understand what it means for a fund’s net asset value. With some ETFs indicating yields or distribution rates at almost 100%, in effect that means almost equivalent erosion of the fund’s net asset value — otherwise known as a “yield trap.” The range of yields in this growing strategic ETF niche is wide — with some ETFs targeting 5-8% and others 8-12%, as well as those verging on 100% — but it is a signal that “lots of education has to be done,” Akins said.

Kuplinska said with any derivatives-based income or hedging ETF strategy, what is taking place behind the scenes at the investment manager running the fund is very important, from regulatory and compliance protocols to the sophistication level of the trading desk. “These are incredibly difficult strategies to back test,” she said on the podcast portion of “ETF Edge.” She noted these ETFs are all subject to regulatory requirements to calculate risk on a daily basis, but she added, “Anything can be a weapon of mass destruction if not used as intended or properly.”

After the the past few years of rapid launches within this ETF category, “white space is much harder to find,” Kuplinska said. Options-based investing has “been done on everything out there,” she added. But she does think one more wave of options-based ETFs is coming and it will be less about the chase for maximum yield levels and designed more to focus on income stability and risk control. 

You can watch their conversation from the most recent “ETF Edge” above to learn more about proper use of options-based ETFs.

Disclaimer

Panama annulled key port contracts held by a subsidiary of Hong Kong-based CK Hutchison in its official gazette Monday, transferring interim operations of the ports to Danish shipping giants A.P. Moller-Maersk and Swiss-based Mediterranean Shipping Co.

The notice formalized a Supreme Court ruling last month that the concessions for the Balboa and Cristobal terminals near the Panama Canal, which Panama Port Company, a subsidiary of CK Hutchison, had held for more than two decades, were unconstitutional.

The Panamanian government on Monday formally assumed control of the port facilities, including cranes, vehicles, computer systems and software under a decree aimed at ensuring uninterrupted operations until a new concession is awarded within 18 months.

Under the interim arrangement, APM Terminals, a unit of Maersk, will operate the Balboa port on the Pacific side of the canal, while MSC’s port operating subsidiary, Terminal Investment, will run the Cristobal port on the Atlantic side.

Shares of CK Hutchison fell 0.9% at the open Tuesday. The stock has climbed over 20% so far this year.

CNBC reached out to CK Hutchison, Panama Ports Company, Maersk and MSC for comment but did not receive a response by publication.

The simmering dispute has become a geopolitical flashpoint between Washington and Beijing, with Panama caught in the crossfire.

After U.S. President Donald Trump alleged last year that China was “running the Panama Canal,” CK Hutchison negotiated a $23 billion deal with a BlackRock-led consortium to sell its non-Chinese port assets. Beijing swiftly intervened, describing the sale as  “kowtowing” to American pressure and stalling the transaction.

The Hong Kong conglomerate has pushed back since the ruling last month and initiated arbitration proceedings against Panama. On Feb. 12, CK Hutchison said that “any steps” that Maersk or its subsidiary takes to operate the ports without its agreement will likely “result in legal recourse.”

Beijing also warned that the Central American country will “pay a heavy price both politically and economically” unless it changes course.

The Panama court’s ruling was seen as a major victory for the U.S., given that the White House has made blocking China’s influence over the global trade artery one of its top priorities.

China has reportedly directed state firms to halt talks over new projects in Panama and urged shipping companies to consider rerouting cargo through other ports, Bloomberg reported last week.

— CNBC’s Emily Chan contributed to this story.

Hyperscalers are significantly ramping up their AI capex spending — and increasingly using credit markets to fund it.

But investors say this shift is challenging mega-cap tech giants’ so-called ‘fortress balance sheet’ status, and rips up what they call the “unspoken contract” that kept speculative AI spending largely separate from debt markets.

After Amazon, Meta and Google-owner Alphabet all unveiled sizable increases in their full-year capex spending plans during earnings season, UBS data indicates that aggregated capex spend among AI hyperscalers could top $770 billion in 2026 — some 23% higher than previously expected.

In a Feb. 18 note, UBS credit strategists said such increases imply a $40 billion to $50 billion ramp-up in borrowing from hyperscalers, pushing public market debt issuance to between $230 to $240 billion this year.

Al Cattermole, fixed income portfolio manager at Mirabaud Asset Management, said this tilt toward the bond market is dramatically shifting the dynamic between hyperscalers and investors.

“For years, we’ve been told this AI spend would be funded by generated cash flow — that it is equity risk, it is speculative, and not to worry about it from a credit point of view,” Cattermole told CNBC in an interview.

“There now seems to be a change in the unspoken contract that while we would continue to lend to these businesses, really AI capex was still going to be equity or cash funded….By bringing capex spend into the debt markets, you now have the question of credit worthiness.”

Last September, Oracle tapped the bond market for some $18 billion in one of the biggest debt issuances on record. Others have rapidly followed, with Google-owner Alphabet recently issuing some $20 billion in debt, including a rare 100-year sterling-denominated bond.

“What if, in three years, these Nvidia chips get outstripped by a Chinese competitor, and I’m lending for five or eight years, and in year three, my data center is obsolete?” he said.