The surge in AI chip financing has created a new type of off-balance-sheet guarantee structure, now valued at $700 billion, leaving the bond market struggling to price this hidden risk.

According to reports from August 15, even before Nvidia announced a $500 billion financing collaboration, bond investors were already growing uneasy about roughly $700 billion in "phantom liabilities" lurking off the balance sheets of major AI companies. These contingent liabilities are rarely visible during normal times but could be triggered at the worst possible moment.

The vehicle for these liabilities is a structural arrangement known as a "Residual Value Guarantee," which could amount to hundreds of billions of dollars. The core of this mechanism is that Nvidia uses its strong credit rating to underwrite customer financing, helping them lower borrowing costs.

How the Structure Works

A typical structure has three layers: a Special Purpose Vehicle borrows money to purchase chips, with the loan backed by cash flows from contracts signed by the technology-using company. If that company stops paying, the assets are re-leased or sold to repay the remaining debt. If a shortfall still exists, the "guarantor" makes up the difference.

A Special Purpose Vehicle borrows money to buy chips. The loan is supported by cash flows from an AI company's usage contracts. If the AI company stops paying, the chips are subleased or sold to repay the debt. If there is still a shortfall, the guarantor—the chipmaker—covers the gap.

This is the essence of the "Residual Value Guarantee": the chip seller acts as the ultimate backstop.

For chip giants like Nvidia and Broadcom, this structure is a "good deal": it helps customers lower financing costs and boosts sales, while the company itself records no debt on its balance sheet. Meta directly states in its filings, "The probability of payment under the RVG guarantee is not high, so no liability has been recorded to date." While the probability is considered low, it is increasingly hard for the market to accept this logic.

Broadcom has extended this logic to the chip financing space. In a project codenamed "Big Sky," Broadcom provided a guarantee for a $35 billion debt transaction. Investors like Apollo Global Management and Blackstone funded the purchase of custom AI chips, which were then leased to Anthropic. This arrangement gave the senior debt an investment-grade rating, lowering financing costs. Unlike data center deals spanning decades, chip financing cycles are shorter, typically amortizing over about five years to match the rapid pace of technology depreciation. This means the guarantee exposure narrows quickly over time, providing lenders with a relatively clear exit horizon.

Nvidia's Entry Could Reset the Scale

Nvidia CEO Jensen Huang posted on X that the company may offer a residual value support mechanism of up to 25% for related opportunities, evaluated on a "case-by-case basis." "Our role is to help unlock a large pool of independent capital while maintaining a disciplined risk exposure," he wrote. Nvidia stated that the collaboration aims to introduce external capital and alleviate the "circular financing" problem—the closed-loop dilemma where AI companies fund each other's product purchases. The six US investment firms involved in this $500 billion financing include BlackRock and Goldman Sachs.

Broadcom's AI XPV platform is an extension of the "Big Sky" deal. According to estimates from Bank of America strategists, the platform could accumulate up to $370 billion in senior debt by mid-2029. This suggests the potential scale of off-balance-sheet guarantees is far larger than current figures.

Rating Agencies Have Issued Warnings

Rating agencies are not indifferent to this trend. Moody's wrote in a report, "The main risk lies in the intensive concentration of such transactions within a short period." The agency believes that a significant increase in Broadcom's obligations, even if its existing debt leverage remains low, would limit the company's financial flexibility and could negatively impact its credit profile. Moody's also noted that Broadcom's guarantees on third-party leases "partially offset strong business advantages," but more guarantees would have a negative effect. S&P Global Ratings has characterized the residual value support provided by Broadcom as a "contingent debt-like obligation" and stated it will be included in adjusted debt calculations.

Under US accounting standards, companies typically only record contingent liabilities on their balance sheets when a loss is "probable and reasonably estimable." Otherwise, they only need to disclose them in the notes to financial statements. This is the institutional foundation that allows these liabilities to remain off the books.

Investors: Financial Engineering is Masking Real Risk

Bond investors' concerns center on one point: when will these off-balance-sheet contingent liabilities become real on-balance-sheet losses? DoubleLine portfolio manager Mariya Entina stated directly, "It's like gaming the system to get preferential treatment from rating agencies and secure the highest possible rating… We are entering an era of financial engineering. This is one of my concerns: when you do financial engineering, you are masking the financial reality."

CreditSights analysts compared Nvidia's residual value support to "selling a put option" in a report. "It's pro-cyclical and amplifies the boom-bust potential," they wrote. "During a boom phase, the guarantee costs almost nothing. But in a severe, sharp downturn, when customers default and hardware market values fall, it becomes most critical." TCW's Global Credit Co-Head Brian Gelfand commented, "This is not ordinary investment-grade credit underwriting. It is far more complex. Given the off-balance-sheet nature, the tail risk is elevated."

Some Say the Worry is Overblown

Not everyone holds a pessimistic view. Janus Henderson Investors Global Multi-Sector and Corporate Credit Head John Lloyd believes that triggering the residual value support requires extreme conditions. "You would have to see a cliff-like decline in the growth rate of token usage, and that is simply not what we are seeing," he said. He also pointed out that these companies are "not trying to hide contingent liabilities, but rather trying to finance them."

The logic of supporters is that chip demand will outstrip supply for years to come; the debt structure is designed to fully amortize over time, and the potential cost of the residual value support decreases accordingly. The technical risk ultimately falls on large tech companies with enough cash to absorb losses. However, critics offer a compelling counter-argument: these guarantees are precisely triggered during industry downturns, exactly when the chipmakers themselves are facing profit pressure. The synchronization of the guarantee with cyclical risk is the core problem.