Hip hop aficionados will remember the duo Mobb Deep. From their sophomore album The Infamous, the song “Shook Ones (Part II)” went on to become one of the group’s most successful singles. On the track, Prodigy and Havoc warn listeners there “ain’t no such thing as halfway crooks.”
A cinephile may recall the line’s reprise in 8 Mile, from B-Rabbit’s rap battle with the antagonist Papa Doc.
Papa Doc – aka, Clarence, whose “parents have a real good marriage” – was a poser, a halfway crook.
This serves as the basis for what I call the Mobb Deep Law of Credit: You can dress up weak credit, but you can’t change its nature. Risk doesn’t disappear; it gets gussied up.
The weak masquerading as the strong. The shook ones. The herbs*.
Consider CoreWeave, the AI darling whose bonds took a tumble last week, ending Friday at something like 83 cents on the dollar. Consider that, for the 12 months ended June 30 of this year, the firm’s adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA,” in finance speak) totaled an eye-popping $4.4bn.
Consider that only four years ago, those same earnings were negative to the tune of nearly $10mm. Consider that, in 2024, a single customer accounted for over 60% of the firm’s revenue – over 65% of its outstanding receivables.
Consider the firm’s net leverage – net debt divided by adjusted EBITDA – of nearly 7 turns. A turn or two above what’s historically given regulators heartburn. Multiple turns above Google, Amazon, Meta.
Consider that CoreWeave, since 2022, has never – not once – reported positive free cash flow.
Bankers will call me naive. “CoreWeave’s core operations throw off cash!” “Capex will generate a return – that’s what they’re financing!” “Trailing EBITDA is irrelevant – check out the annualized metric!”
Sky-high expectations are good. Rapid growth is better. But neither is as informative as a stable track record. I assume neither helps CoreWeave bondholders sleep comfortably at night, knowing the firm has increased net debt more than 50% this year alone. More than 300% in the last 18 months.
A credit underwritten materially on hope is gussied up. It’s Clarence, asking his barber for a fade.
There ain’t no such thing as halfway crooks.
* I am very aware that I, in all likelihood, don’t even qualify as a herb.