In October, OpenAI secured a 4 billion dollar revolving credit facility from J.P. Morgan and several other banks. I was surprised when I heard this because OpenAI is a young company with no earnings.…
In October, OpenAI secured a 4 billion dollar revolving credit facility from J.P. Morgan and several other banks. I was surprised when I heard this because OpenAI is a young company with no earnings. Shouldn't all their capital come from investors? Let's run some numbers.
From first principles
Let's do an Expected Value (EV) calculation, first from the perspective of an investor and then from the perspective of a lender. We'll pick some arbitrary parameters first, then refine.
Putting our investor hat on, the possible returns for investing $1,000 into OpenAI look like this:
- Cost: $1,000
- Case 1 (90%): OpenAI goes bankrupt. Return: $0
- Case 2 (9%): OpenAI becomes a big successful company and goes 10x. Return: $10,000
- Case 3 (1%): OpenAI becomes the big new thing and goes 100x. Return: $100,000
Our expected value is:
\[\begin{align} EV &= -1000 + 0.9 \times 0 + 0.09 \times 10000 + 0.01 \times 100000\\ EV &= -1000 + 0 + 900 + 1000\\ EV &= 900 \end{align}\]The EV is positive, so this is a good investment. Obviously, there's a 90% chance of it going to zero, so if this were our only investment, it would be an insanely risky one. But provided we can do many investments like this and provided their failure cases aren't correlated, this would be a profitable strategy.
What happens if we instead put our lender hat on? Using the same probabilities as above, the possible returns for lending $1,000 to OpenAI at 5% interest look like this:
- 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
Lenders don't benefit directly from the success of the company. Whether it barely scrapes by but manages to repay the loan or becomes the greatest company ever and easily repays the loan, it's all the same to a lender. So, we can merge cases 2 and 3 into:
- Case 2+3 (10%): OpenAI doesn't go bankrupt. Return: $1,000 + 5% interest = $1,050
This makes our EV in the lending case:
\[\begin{align} EV &= -1000 + 0.9 \times 0 + 0.1 \times 1050\\ EV &= -1000 + 0 + 105\\ EV &= -895 \end{align}\]The EV is negative, so we'd end up losing most of our money on average. Lending on these terms doesn't make sense.
There are two numbers we made up in the above calculation: the probability of bankruptcy and the interest rate. Let's leave the interest rate fixed at 5% and see what the probability \(p\) would have to be for us to break even.
\[\begin{align} EV &= -1000 + p \times 0 + (1 - p) \times 1050\\ EV &= -1000 + 1050 - p \times 1050 \\ EV &= 50 - p \times 1050 \\[0.5cm] & \text{Set EV to 0} \\[0.5cm] 0 &= 50 - p \times 1050 \\ p &= \frac{50}{1050} \\ p &= 0.0476 \end{align}\]So, we'd break even if the probability of OpenAI going bankrupt was only about 5%. In practice, we'd want it to be lower than that so that we made a profit and so that we had a margin of safety in case our assumptions were wrong.
This 5% failure rate seems very optimistic to me, but this scenario is basically the one the consortium of banks got into. Concrete details on the deal are sparse, but this CIO Leaders article claims the interest rate was "SOFR + 100 basis points". The overnight SOFR rate is about 4.1% in October, so this puts OpenAI's interest at about 5%.
From market data
The problem with the above expected value calculation is that it's very idealized. The shape of it is correct, but the real world is too messy to be accurately represented by just a couple of parameters. I think it would be very difficult to build a model with enough predictive accuracy to be useful and I suspect there just isn't enough publicly available data to plug into it to make it work.
Luckily for us, banks exist! We know the banks have the better model and the non-public data and we know they came up with about 5% interest. So, let's work back from that and see what we can learn.
We're talking about a loan here and that's very similar to issuing bonds. So, we should be able to look at the bond market and find companies in similar financial health (from the perspective of a creditor). One problem is that we only know the overnight rate for OpenAI of about 5%, but bonds on the market will have longer maturities. We need to calculate what what yield a longer maturity loan would require and we can do that by looking at US treasuries.
According to Bloomberg, the three month treasuries have a yield of 3.94%. One year ones have a yield of 3.58%.
One way of thinking about corporate bonds is that they're basically treasury bonds plus some premium to account for the risk of default. This default spread seems to be about \(5\% - 3.94\% \approx 1\%\) in OpenAI's case. By this logic, OpenAI's one year debt would have a yield of about 4.6%.
Can we find some one year bonds with a yield of 4.6%?
Some bonds in the vicinity of what we're looking for are:
- 4.99%: HCA Inc. (US healthcare provider with credit rating BBB),
- 4.73%: Ziraat Katilim (Turkish bank with credit rating B+), and
- 4.24%: Citigroup (US bank with credit rating A).
In fact, scanning the sample above, it's mostly banks with BBB and A ratings. So, the consortium of big banks seems to have lent money to OpenAI at the kind of rates they themselves are borrowing at.
Looking at just a few bonds is interesting, but anecdotal. It would be better if we had some statistics across the whole bond market. Helpfully, Prof Damodaran goes through the exercise of calculating just such statistics (archive link) every year, most recently this January.
Looking up OpenAI's default spread of 1% in that table, we see it's at the level we'd expect for an A- or BBB firm (same as with the anecdotal search earlier). This normally corresponds to an interest coverage ratio of 3.00-4.24. However, OpenAI's actual interest coverage ratio is negative because their earnings before interest are negative.
This doesn't make sense: any way we look at it, OpenAI is getting the kind of interest rates only much more established and profitable firms would be getting. So, my initial surprise at hearing about this is justified, but there must be an explanation because the big banks wouldn't make such an obvious mistake.
Making this make sense
OpenAI is not a profitable company. It's also a private company, so we don't get to see audited financials, but we still know some things. 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.
There's also speculation that their revenue next year will jump to $11.6 billion. However, there's no speculation about what their earnings will be because they're currently selling their services below cost and there isn't really any story as to how they'll turn this profitable.
The banks are lenders in this scenario, so they don't really care about how many users OpenAI gets or how huge their revenue becomes. As lenders, all they care about is getting paid back and it really doesn't seem like OpenAI will have the earnings to do that. But maybe earnings aren't what matters here.
If OpenAI can't pay its debts, it goes bankrupt and the creditors seize the company. Importantly, they seize it from the equity holders. Who are these equity holders? According to this Digital Information World article, the owners are Microsoft (28%), OpenAI non-profit and employees (52%), and other investors (20%).
So, the hypothetical is OpenAI runs out of money. They have revenue, but since their costs are higher, they don't actually have anything left over. They can't make interest payments on their debt, so they go bankrupt, and the banks seize the company from Microsoft. I don't think Microsoft will allow this to happen. Microsoft's earnings for last year were $88 billion, so I think Microsoft will just pay off OpenAI's $4 billion debt in this scenario. And I think the banks know all this.
So, the banks loaning money to OpenAI at an A- interest rate doesn't make sense, but effectively loaning the same to Microsoft with its AAA rating does, and that's what's actually happening here.
Read the original article
Comments
By seanhunter 2025-10-2020:068 reply What a weird analysis.
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.
By appleiigs 2025-10-2020:25 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.
By mamonster 2025-10-2020:13 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.
By agentcoops 2025-10-2020:56 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.
It's a badly researched article too.
> 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...
By jay_kyburz 2025-10-212:352 reply Who is paying them all that money do you think?
By nl 2025-10-214:40 Paying them the revenue?
Well I am personally, and the last 2 places I've worked have too.
Worth every cent!
Are there other examples of well capitalized technology startups that have significant revenues that have also opted for significant debt financing?
By empath75 2025-10-2020:20 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.
Amazon issued $1.25 billion in convertible debt in 1999: https://www.wired.com/1999/01/an-amazonian-debt/
By dmurray 2025-10-2021:01 Convertible debt is very different: if you do the same (simplistic) analysis as in the article, it behaves almost like the equity example, not the debt one.
We had way more debt than venture financing in the pre-ipo days of DigitalOcean. Thanks Michael Dell!
By president_zippy 2025-10-210:03 As a shareholder, thanks for going the convertible debt route! I like the fact that the company became profitable but the call option component of the previous round of "senior convertible notes" expired out of the money.
Comparatively speaking, I don't know why investors won't touch DOCN with a 10-foot pole, but I will gleefully reap my returns from dividends and stock buybacks when DOCN laps AWS in 20 years with better services maintained by better engineering staff.
By nl 2025-10-210:05 It's so common that mismanagement of risks associated with it led to the fall of Silicon Valley Bank.
This Forbes article has a good overview: https://www.forbes.com/sites/amyfeldman/2023/03/19/silicon-v...
By JumpCrisscross 2025-10-2022:082 reply > well capitalized technology startups that have significant revenues that have also opted for significant debt financing?
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.)
By terminalshort 2025-10-211:291 reply It stems from the relatively low capital requirements of tech companies relative to other industries (pre-LLM). Now that this factor has changed we see them rapidly adopting debt financing for their capital intensive LLM projects.
By JumpCrisscross 2025-10-212:481 reply > stems from the relatively low capital requirements of tech companies relative to other industries (pre-LLM)
Not really. Tech, including low fixed-cost software, has been tremendously capital intensive for decades. Early-stage start-ups lack the cash flows to fund debt. But post-Series B companies raising equity are generally doing so for idiosyncratic reasons, e.g. capital sponsors being concentrated in equity for historical reasons, valuation escalators and capital denial to competitors.
By terminalshort 2025-10-214:311 reply I don't think you understand what capital intensive means. Many tech companies are started out of their founders apartments for essentially 0 startup cost and from here the only serious costs are salaries and AWS. There's a reason that tech founders get so much richer than founders in other industries and that reason is because the minimal capital requirements allow them to sell off so much less of the company before reaching massive scale.
By JumpCrisscross 2025-10-218:17 > don't think you understand what capital intensive means
I may have missed something in my career on Wall Street, as a founder and in VC.
(Being wrong is fine. Being confidently wrong is dumb.)
> Many tech companies are started out of their founders apartments for essentially 0 startup cost
You’re mixing up fixed costs and capital. Both fixed and operating costs consume capital. (We call the latter working capital.)
(You may also be mixing up PP&E and capital.)
> a reason that tech founders get so much richer than founders in other industries and that reason is because the minimal capital requirements allow them to sell off so much less of the company before reaching massive scale
This is wrong. Obviously wrong.
Tech founders get richer because their companies get bigger. Apple, Tesla, Google and Saudi Aramco have massively different capital requirements. Their owners (and founders/founding lineages) are in the same ballpark.
Similarly, most family businesses never sell equity until they sell the business. And most tech founders don’t have a majority of equity after a couple rounds.
By mamonster 2025-10-2110:31 >Well-capitalized companies rejecting debt is more of a Silicon Valley outlier in the global economy.
IMO it's because CFO is treated as a second-tier C-suite role in Silicon Valley and a lot of the CFOs are completely substandard as a result.
A lot of CEO have the mentality that if the product and the tech works the money sorts itself out, so your CFO is already behind the CTO and the CPO.
By Closi 2025-10-2020:12 By shmatt 2025-10-2020:18 This is literally the reason behind the collapse of Silicon Valley Bank. Debt keeps your cap table untouched, its very tempting at certain stages
By reaperducer 2025-10-2020:142 reply Are there other examples of well capitalized technology startups
I think we're well beyond the point where OpenAI can be called a "startup."
Pointless argument unless you define what startup means.
Different dictionaries provide different definitions.
A common one is that it's small and recently started business, but it's a very vague boundary.
By reaperducer 2025-10-211:391 reply Half a trillion dollars isn't "small" no matter how vague you want to make the boundary.
By epolanski 2025-10-2112:59 Neither a billion isn't small no matter how vague you want to make it, yet, we label startups with this valuation as unicorns. So where is the boundary? 10 billions? 100? 1000?
By timcobb 2025-10-211:16 This looks like a case of the author doing their own research
By terminalshort 2025-10-211:26 Generous of you to call that drivel "analysis." Doesn't even bother to find out what the collateral for this loan is.
By bobxmax 2025-10-2022:21 [dead]
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.
By JumpCrisscross 2025-10-2022:112 reply > 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.
By array_key_first 2025-10-2112:21 The American economy minus AI is most definitely in a recession. The common people are struggling to buy groceries. Wages have been stagnant and prices go up and up.
The problem is that AI is ultimately a luxury good. Even at it's currently ultra-subsidized rate, it's hard to justify. If it gets any more expensive, no consumers will buy it.
Which might be fine, if we turn to enterprise. Except: a problem. Companies produce goods, which people then buy. AI can replace labor maybe, but it can't replace consumers.
By dsr_ 2025-10-211:18 You are much more optimistic than I am about the attention the present regime pays to anyone who wants money from them, versus those who are promising them planes and donations and outright cash bribes.
Bluntly: nobody in the Trump administration has the ability to soft-land the economy. When the ship is undeniably sinking, the rats will flee.
By dragonwriter 2025-10-2023:291 reply > 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.
By throwaway2037 2025-10-210:13 Do you have examples of this? I would like to learn more.
A quick Google search tells me:
> Generally, a U.S. company can sell assets below cost, as long as the transaction is transparent, conducted in good faith, and serves a legitimate business purpose.
By alon_honig 2025-10-211:02 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.
4) If things don't go great, OpenAI will be looking for more financing. Guess who will help them?
Who? I can only think of the Saudis/UAE and SoftBank.
By lordnacho 2025-10-2021:04 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.
By nl 2025-10-210:25 > more financing
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:.
By rester324 2025-10-210:30 > 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?
By dboreham 2025-10-2023:24 > immediately said 40%, with no explanation
This means the number is wrong.
The math 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.
By addicted 2025-10-2020:08 This is correct.
This isn't a financial transaction. This is a "relationship" transaction.
By JamesBarney 2025-10-2020:13 Not to mention the risks that OpenAI even if it does goes bankrupt sells for less than 4b is not anywhere close to 90%.
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
> a company with 800 million weekly active users
Wow, that's slightly more than Yahoo has. Well, had.
By HaZeust 2025-10-217:00 Yahoo is a disingenuous parallel here. Yahoo lost because they didn't correctly embrace their market position in what's otherwise the very ripe industry of search engines. Search engines created the 4th most valuable company in the world (Google).
We don't know how ripe OpenAI's industry or market position is, yet. Yahoo knew what they had lost pretty early onto its spiral.
By empath75 2025-10-2020:22 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.
