AI turns to a new type of lending

0:02Good morning from the Financial Times. Today is Friday, February 27th, and this is your FT &E's briefing. Netflix is walking away from the battle for Warner Brothers' discovery. Some tech companies can't buy semiconductors outright, so they're turning to rentals. Plus, investors are using a workaround to dodge AI volatility. So planning for the future is incredibly hard, so investors are looking for insurance of whatever kind. I'm Mark Filippino, and here's the news you need to start your day.

0:41It looks like we have a winner in the bidding war to take over Warner Brothers' discovery. Netflix said late on Thursday it is not going to sweeten its offer to buy the company. That decision to bow out paves the way for Paramount to triumph in its battle to take control of the storied Hollywood studio. It comes after Warner Brothers earlier in the day declared Paramount's$31 per share offer to be, quote, superior to Netflix's proposal. It's a stunning turnaround for Paramount. It first approached Warner Brothers last year about a takeover. That kicked off a months-long and brutal bidding war for the company.

1:15Paramount's latest offer would cover the$2.8 billion termination fee owed to Netflix. And, oh yeah, the deal is for the entire business, which includes CNN, HBO, and other cable networks. Netflix shares soared an after-hours trade on the news.

1:36The AI arms race has sparked a new kind of lending. Tech companies are leasing the chips that train their large language models instead of purchasing them outright. They kind of work like a car loan where the vehicle is used as collateral. This helps them find the huge sums needed to remain competitive, and investors like it too. Here to explain more is Michelle Chan, our U.S. credit correspondent. Hi, Michelle. Hey, hi. Thanks for having me. Good to have you. So how did this type of lending start? Where did it come from? Yeah, it really begins because of the AI arms race and how much money is required to stay competitive in the AI development.

2:16Chips are extremely expensive and they're getting more expensive day by day. So corporate usually don't want them to be on their balance sheet and they want to find a more asset-like model to be able to operate. Instead of buying chips, they are leasing them, and they are paying a stable monthly rent on the chips, just like how some people are leasing their cars. So they give these chips back, is that right, when the rental time is up? Not necessarily. They sometimes just resell these chips in the second-hand market, and this is also a big question mark of how much these chips are going to be worth a few years later.

2:55And we can get into that in a little bit. Before we do, what are some of the advantages of this kind of deal for lenders and borrowers? And can you give us some recent examples? Sure. For lenders, it's really simple. You get higher yields than lending to the companies themselves. So these are loans that are secured by the rent paid by the tech companies. So you usually get higher returns than lending to XAI, for example, because there is an additional layer of risk involved. So private equity firms and private credit funds are really getting into the game. Apollo is a big player. And last month, they just closed a$3.5 billion financing package for XAI.

3:39Basically, they lent money to an infrastructure fund. And the infrastructure fund set up a vehicle to buy the chips. And the chips are being leased to Elon Musk's XAI. And this way, Elon Musk don't have to buy all the chips himself. and he can still enjoy the benefit of using the most updated and the most advanced chips through leasing. Sure. So let me ask you this. If I'm a tech company and I default, what happens then? Right. This is a really good question because this is something that lenders are betting against. They are very comfortable that these tech companies would be able to pay rent down the road and these loans are secured by the rent payment on the chips.

4:21So if a tech company defaults, basically you'll have to find ways to sell the chips. And the problem is no one knows how much these chips are going to be worth a few years down the road. It's not like a car where there are a history of how much a second-hand car is worth. AI chips is so new. No one knows how much they're going to be worth in the second-hand market and whether actually someone would want them down the road. So this is a big question mark in the market right now. So it sounds like this could be really risky for investors. They are essentially betting that tech companies will continue to pay rent and everything will be all right.

4:58But if they don't, it could be very risky. That's the FT's Michelle Chan in New York. Thanks, Michelle. Thank you.

5:11U.S. tech stocks saw another sell-off yesterday. the Nasdaq fell as much as 1.9%, that's despite a blockbuster earnings report from NVIDIA on Wednesday. A lack of clarity on the chipmaker's revenue outlook added to investor concerns about big tech spending on AI infrastructure. Okay, so this ongoing volatility in the tech sector is clearly worrying Wall Street. And part of the concern, as we just heard from Michelle and investor reaction to NVIDIA, is about advancements in AI. Investors are questioning whether that That'll make some software obsolete. But Wall Street's got a hedge. Here to explain is the FT's George Steer.

5:51Hi, George. Hello. So what kind of strategies are investors looking at to protect themselves from the software sell-off that we're seeing? Well, the reason they're having to look for niche kinds of trades in the first place is because the rolling sell-off in the software space that we've had over the past few weeks has been so unpredictable. Different parts of the market have sold off very aggressively off the back of substack blogs and Twitter rumors and all sorts of things that ordinarily investors might not pay as much attention to. So in order to kind of protect themselves from the markets kind of trying to exploit how individual stocks have become incredibly volatile, while the S &P 500 itself is kind of treading water because as software has sold off, other parts of the market have climbed.

6:42So traders are trying to exploit that kind of disparity right now, and they're doing all sorts of funky things. And one of those things is called dispersion trades, which you just described. Exactly. Give me a little bit more of an example of how one of these things would work. What does it look like on paper? It involves selling options on an index like the S &P 500 or the NASDAQ 100 while buying options on different stocks in those indices. So you might bet that NVIDIA is going to move around a lot in the next week. But as I said before, because the index itself isn't jumping up and down like crazy or anywhere near as much as companies within it.

7:22This dispersion trade allows you to kind of exploit or arbitrage that gap. It's a clever little technique that has become increasingly popular over the past few weeks. Yeah, how popular? Where are we seeing this kind of appetite? So typically it would be hedge funds who employ these kinds of strategies, dispersion trades. But people that my colleague Rachel and I have spoken with over the past few days, We spoke with someone at SockGen, for example, who said wealth managers and more traditional asset managers are also now looking to use these dispersion trades to kind of protect themselves against the unpredictable software sell-offs we've seen basically since the start of the year.

8:02It's kind of interesting that they're turning to these dispersion trades instead of just selling these stocks wholesale or shorting them if they are this vulnerable. How come they're turning to dispersion trades instead? I'm sure they're doing that too. They'll be shorting certain parts of the market. It's unlikely that investors have totally sold out of big software companies because at the moment there's just a risk that the biggest players might one day, perhaps, potentially, hypothetically, be impacted by AI. I imagine that investors think it would be premature to completely move out of those stocks.

8:36So I imagine there is some shorting involved and that the dispersion trade or variations of it are being used on top of those more vanilla types of strategies. Right. So it's a supplementary strategy rather than a replacement. It's just another way to hedge against volatility. But will it actually protect them? Well, I imagine, yes, it's a good way to exploit the market environment at the moment. It makes sense. That's why so many people are doing it. The risk, I guess, is if some other catalyst in the next few weeks comes out of the blue, that causes the entire market to sell off kind of in unison.

9:13In which case, such a scenario, the VIX index, which measures the S &P 500's implied volatility, that would jump massively, and that would ruin the dispersion trade, basically. The FT's U.S. markets correspondent, George Steer. Thanks, George. Thank you.

9:33back in january legendary investor warren buffett handed the reins of berkshire hathaway to his more low-profile vice chair greg abel on saturday it's abel's turn to pen his first letter to shareholders the note has historically been very closely watched so what are we looking for under the company's new ceo victoria craig is the host of the monday edition of the ft news briefing she joins me now to discuss. Hi, Victoria. Hey, Mark. So what are we expecting to see tomorrow?

9:58George Steer: Well, it's a good question because Abel hasn't really been very vocal about his vision for Berkshire. So this shareholder letter is going to be really our first opportunity to hear directly from him. And as you said, this is a tradition that isn't just tracked by Wall Street investors. It's executives and also mom and pop investors across the country too. So we're all going to be watching for how ABLE plans to deploy Berkshire's vast portfolio. And one question has been whether ABLE was actually involved in Berkshire's more than$4 billion investment in Alphabet late last year. I think it's important to remember here that Buffett was beloved for his very common sense investment strategies.

10:39George Steer: And for the most part, that meant steering clear of things like flashy tech investments. So the answer to this question really could signal whether there's a bit of a shift at the company when it comes to big bets of fast-growing tech companies. Beloved might be an understatement with how people feel about Buffett. I mean, they were fanatical about him. Yes, absolutely. People loved him. So it's not just the letter we're getting, but a couple of other important updates too, right? Yeah. So this letter is going to be released alongside the company's annual report and its fourth quarter earnings.

11:12George Steer: So that's going to give us a sense of how Berkshire performed under the last quarter of Buffett's leadership before he stepped aside this year. It's important to remember, too, that Buffett has stayed on as chairman of Berkshire. And he said that he plans to continue showing up at the office every day. He also still holds a significant portion of Berkshire's Class A shares. So that gives him a lot of sway. So I think although he's not making day-to-day decisions at the company, he is still an active presence at Berkshire. Our sister podcast, Behind the Money, did a great episode on the fanaticism behind Berkshire Hathaway and the succession planning leading up to Greg Abel's appointment.

11:52We'll have a link to that in the show notes. Victoria Craig will be in your ears first thing Monday morning right here on this podcast feed. Thanks so much, Victoria.

11:59George Steer: Always a pleasure. Thanks, Mark. You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back next week for the latest business news. The FT News Briefing was produced this week by Julia Webster, Sonia Hudson, Fiona Simon, and Victoria Craig. I'm your host and editor, Mark Filippino. Our show is mixed by Alex Higgins and Kelly Gary. We had helped this week from Michaela Tindera, Peter Barber, Michael Lello, David DaSilva, and Gavin Kallman. Our executive producer is Topher Forges. The FT's global head of audio is Cheryl Brumley, and our theme song is by Metaphor Music.