Rate hike underlines our scary problems, $44b moment for Firmus & private credit’s house of cards

Chanticleer

The episode dissects the RBA's latest interest rate hike to a 15-year high of 4.6%, analyzing how blunt monetary policy is impacting younger households while struggling to cool AI-driven and deficit-fueled

Key takeaways

• RBA Governor Michelle Bullock raised the cash rate to 4.6%, with hosts arguing the blunt instrument disproportionately harms leveraged younger families while failing to cool sectors like AI data center construction.
• Firmus priced its IPO at $11 per share, targeting a ~$43.7 billion market cap, heavily reliant on long-term contracts with hyperscalers like Meta and OpenAI that added ~US$800 million to EBIT forecasts.

Main topics

• RBA interest rate hike and monetary policy transmission
• Firmus AI data center IPO valuation and market dynamics

Notable quotes

"The gulf between the believers and the disbelievers at the moment."

Conclusion

The episode underscores how structural economic pressures, from soaring bond yields and

Transcript preview

Speaker 4 (0:00) you Speaker 4 (0:04) The Australian Financial Review. Speaker 2 (0:08) Hello, I'm James Thompson, Senior Chanticleer Columnist at the AFR. Welcome to our weekly news breakdown of all things business, finance and markets. Speaker 2 (0:19) With me today, as always, is my Chanticleer colleague. He's still a chance to get a late call up as the pre-game entertainment at Sunday night's Rugby League Grand Final. It's Anthony McDonald. How are you, Anthony? Stage name, Speaker 3 (0:32) what do you reckon, James? Tony and I or McDonald Lamour? Speaker 2 (0:36) Very good. Speaker 2 (0:38) This week we explain why the RBA's latest rate hike is even scarier than it looks. We ask whether Australia's private credit sector is in a mess. And reveal why the debate around Australia's $40 billion float prospect, Firmus, is only getting hotter. Speaker 2 (0:56) And let's start there, Anthony. The Firmus Circle rolls on. This week, we had a couple of bits of news. There's an expansion of the data center operators deal with Mark Zuckerberg's meta platforms. And then we got the term sheet for the float, which reveals how much this thing is going to be worth when it lists. End our suspense, Anthony. $11 a share, James, and that means Speaker 3 (1:17) nothing, right? But market cap, a cool 43.7. Billion dollars. Wow. Billion. Now, that's five times the next EC, which has been listed for 16 years in the top three data center developer in Australia. That's 50 % more than Coles. 850-odd supermarkets, $46 billion revenue. Oh, wow. That's only just shy of Fortescue, the third-fourth in the Pilbara. It's reported $10 billion EBITDA a year or more for the past seven years in a row. You know, Mr. Consistent. So, yeah, mate, this thing's big, as we expected. It's charging ahead. Pricing's out. Along with that pricing, there was a message in the term sheet. They've had enough indications of interest to get the deal done at that price. Right, right. But, you know, I mean, take those indications with a grain of salt. They're not actual proper bids. The bids are supposed to be properly locked in next week. So it's a huge week next week. The book's open on Tuesday. They're supposed to close on Friday. It either lives or dies, basically, next week. I've been covering these IPO book builds for 16 years. This one's. Unlike any, just because the numbers are so big, just because there's so much history or short history, lack of history to it. You know, we've got this company that's got two little data centers effectively now with so much money. It's got such big plans. Maybe it works, maybe it doesn't. It's all about AI, wrapped up in the AI story. I mean, you mentioned Meta. Meta's the big customer in Australia for Firmus. It basically has a right to occupy whatever Firmus builds, should it keep building. Over the next few years in Australia. It signed on as a customer to Firmus' data center in Indonesia, which it wasn't before, right? It basically bought a third of the capacity of this new Indonesia site. And that added US $800 million to Firmus' EBIT forecast, right? That's about a billion dollars Aussie. Yeah. Just that one contract. It's Speaker 2 (3:01) amazing stuff. So a company that is going to help Mark Zuckerberg serve up. AI slop across Facebook and Instagram is going to be worth 50 % more than Coles, which feeds us every week. 100%. It's amazing times we live in, isn't it? Isn't it? It is just mind-blowing. Yeah. Anthony, I want to bring in a question here, an early question from Austin, who's a regular listener from Brisbane. He's trying to work out what Firmus' competitive edge is. As we've said, they're a neocloud operation. The best explanation Austin can find is that they've developed cooling power management and software orchestration systems that makes its AI factory infrastructure efficient. But Austin's had a look. at the patents behind the tech. It's fair to say he's not exactly convinced about the technical know-how of the company. The question is, why does anyone believe that Firmus has value outside of its success in signing up a handful of five-year customer contracts, the terms of which are not widely available? That's not much to hang your hat on to justify spending 12 or 13 times earnings to buy in. Is Austin missing something here? Austin's... missing the belief that Speaker 3 (4:11) Firmus's founders and all of its backers have. But yeah, Austin, I 100 % agree with you. And I mean, I think we spoke about this a couple of weeks ago. Like they've signed a bunch of what look like at face value, really good contracts, right? They're sort of five years in nature. They're big, they're with, you know, Meta, OpenAI, NVIDIA, et cetera. But you're supposed to be paying, you know, 10 plus times earnings for this. So you're basically, you're thinking that you've got revenue and earnings locked in for five years, but you're paying 10 times. So you're paying twice as much as that to own the company. So you've got to actually believe that there's more to Firmus than just these contracts, right? That it's going to be able to keep building, keep re-signing these contracts. And when the contracts come up for renewal, that the demand supply situation for AI tokens is going to be as good as it is today, if not better. Otherwise, the whole thing's hard to see taken Speaker 2 (4:57) off. So just on the book build quickly, obviously, Firmus is going to have a lot of interest from overseas players. We know that. NVIDIA is going to be an investor. We think Blackstone's going to be an investor, the big US capital giant. Is it going to get a lot of support from Australian institutional investors? Speaker 3 (5:12) It's really hard to find an Australian saying nice things about it, right? There's such a gulf between the believers. and the disbelievers at the moment. And the believers seem to be those that are sort of in on the story already that backed it 12 months ago that have made 20 to 40 times their money already before its listing. I mean, they're saying they're going to buy more. Phil King, for example, at Regal says he's going to buy more. Speaker 2 (5:33) But Speaker 3 (5:34) then anyone that's not in on this already, there's just such a long list of potential risks. You've got recontracting risk, tech risk, reg risk, financing risk, interest rate risk, construction risk, social license risk. There's so many risks, right? There's so many unknowns to this. And then there's unknowns about where the whole AI thing goes as well. So in terms of your regular Australian fund manager, I think, you know, struggling to wrap their head around it. Yeah. There's Speaker 4 (5:57) a Speaker 3 (5:57) few of these things offshore. So, you know, firmers as bankers would say people that own equivalent businesses offshore are buying in too. But if it is worth $43 billion, James, I mean, every big super fund in Australia is going to have to make a decision whether to buy it or not because it will be big enough to get into the index. you know, from there, who knows? Yeah. Okay. Well, we'll watch closely. James, the big story in markets remains bond yields, which just keep marching higher. The US 10-year yield is at 5.3%, up from 4.4 % at the end of June. And the 30-year US treasury yield is up at 5.6%, up from 4.9 % also at the end of June. James, these yields, they just won't stop. going higher. We're talking about the highest since 2002 for the 10-year, right? They're well and truly past the level where equity markets should start to feel the pain. And yet Wall Street's less than 2 % away from its all-time high. So can we sound the all clear here? Oh, Speaker 2 (6:50) you know what Mr. Bear's going to say to that, Anthony. No, we're not sounding the all clear. In fact... Yes, you're right that Wall Street is less than 2 % away from its all-time high, but things are breaking quietly in markets. Here's an interesting stat for you, Anthony. The S &P, as we said, is trading within 2 % of its all-time high. But at the same time, 70 % of the stocks in the S &P 500 are at least 10 % below their own highs. Yeah, right. So what we are seeing here is that the market is being held up by a very small group of stocks. Guess what industry they're in, Anthony? AI. Yeah, that's exactly right. So AI stocks are holding the market up, as they have been for a long time. But what we are seeing is cracks appearing across the market. This is an idea called market breadth. So how broad is the market? And at the moment, the market's got very bad breadth. There's another index in America, the Russell 2000. It's the 2000 largest stocks listed in America. 50 % of those are trading at least 10 % below their own highs. So- Underneath the surface of the market, there's lots of businesses that are just absolutely treading water. We're seeing junk bond credit spreads widen, triple C grade credit. It's the sort of the riskiest corporate credit out there. It's not necessarily you wouldn't touch it with a 10-foot pole, but it's the riskiest sort of credit. Those credit spreads are widening because people are seeing borrowing rates and bond yields going up and they're thinking, oh. I'm not so sure about these guys anymore. So I think we are seeing these little cracks start to form below the market. This bond yield story, we've talked just there about the American story. The bond yield story is getting even crazier in places like France. You know, bond yields there are at three-decade highs. They're at three-decade highs in Japan. Things are looking pretty grim in Germany and Greece and all sorts of places. Britain, things aren't looking good. And it's this combination of pressures. You know, we've talked about this before. Yes, a bit of it is growth driven by AI, but there's also this unrelenting pressure on energy. The Europeans have a real problem with diesel at the moment. You know, America's talking about export bans. Trump is basically threatening the Europeans saying, hey, you want more diesel, just release some of your strategic reserves. We can't do all the heavy lifting for you. In some ways, it's fair enough. So Americans are putting pressure on the Europeans to... do something more about their energy problem, but that's going to be expensive. And then you've got all these domestic political issues. In France, the political situation's a mess. They're trying to cut the budget, but neither side of politics really wants to do that. Of course, the voters don't want to see that happen. So we've got this absolute mess of a political situation, which is inflaming the bond market further. So, Anthony, will we see these cracks start to... develop into something a bit uglier. It feels like this great AI shield around equity markets is holding pretty firm at the moment, but there's a lot of debt in these AI businesses now, as we've just heard from Firmus. The amount of debt required to... keep this merry-go-round turning is now extraordinary. And debt is where problems tend to be created. I wouldn't be surprised if there's a debt-related crack in the AI story as well coming up. But I don't know, Anthony, am I being too bearish? Well, Speaker 3 (10:15) I remember saying a few weeks ago that as soon as bond yields cross 5%, it's really hard for equities to keep going. And that is completely wrong. But from what you're saying there about how the equity markets have reacted, it sounds like it's a bit of a narrow road to the deep north. Booker Prize winner Richard Flanagan wrote in terms of the actual story. It's a small section of the market that's really driving it higher and is all AI. Speaker 4 (10:36) I Speaker 3 (10:36) mean, at the moment, there's this sort of this time it's different feel about it all, which is always dangerous in markets. Every few years, something comes along and people think this time it's different. This time, the thematic behind it is so good that we can get through 5 % bond yields and equities can go up and everyone can make money and all that sort of stuff. Is the AI that different? I don't know, but the market's certainly saying at the moment that this is a once-in-a-generation investment boom and the money's going