After the correction in the share price of Merlin Properties (around 20% since the end of July), the market has extended its concerns to the counterpart of its initial AI contracts. CoreWeave, its main tenant in the data centre business, is at the centre of the debate regarding the return on investment in AI: the yield on its 2031 bond has exceeded 15% and its 5-year CDS is above 1,000 bps (levels that S&P considers to be stressed), compared to 368 bps on 6 October. The company has accumulated over $51 billion in debt and obligations to finance its expansion and has a rating of B+ (S&P). According to S&P Global, the market does not question the demand for its services, but rather whether cash flows will ultimately materialise.
In light of this situation, Merlin Properties has responded to our questions. Firstly, the company insists that the concentration is temporary: CoreWeave represents nearly 80% of the 160 MW operational or pre-leased in Phases I and II, but the intention is that, with the platform fully developed, the exposure to any tenant will be less than 20%. As of 1S26, CoreWeave accounts for 8.6% of the total revenue of the Spanish company.
Regarding protection against default, Merlin points out that its contracts include guarantees and backstops, with additional guarantees in the contracts with CoreWeave, and that it has the capacity to cut off the electricity supply in case of default. On the other hand, the leased capacity is fully utilised by CoreWeave's end customers and generates margins for it that are significantly higher than the rent it pays to Merlin. This, along with guaranteed financing on infrastructure, equipment, and contracts, should lead financiers to intervene to protect an operating asset.
Additionally, the company highlights that the Spanish legal framework and contracts provide protection over the installed IT equipment, with compensation rights in case of withdrawal. It also emphasises the potential for re-leasing: the key asset is scarce connected capacity and an equipped data centre, which facilitates its marketing to another operator or the end user.
We view the company's response positively. With 8.6% of revenues, the impact of an adverse scenario on the current income statement is limited, and the commitment to limit the weight of any tenant to less than 20% addresses the main risk of temporary concentration. Likewise, we believe that the visibility of CoreWeave's contracts in the short term mitigates the risk of any default by the company.
In this regard, we consider that the main risk is more indirect than default-related: that a capital cost of around 15% limits CoreWeave's ability to finance the deployment of already pre-leased capacity or its appetite for new phases, and that it conditions the pace of marketing the platform. As catalysts to watch, we highlight the evolution of CoreWeave's spreads, the signing of contracts with third parties in Lisbon and Madrid by Merlin, and the evolution of CoreWeave's weight on pre-leased capacity.
Merlin Properties: crosswinds for the big bet on AI
