AI financing: the growing cost of deferred interest

An AI data centre has to be built before its tenants start paying rent. Financing can bridge the wait by adding interest to a loan or allowing a preferred investor’s claim to grow instead of paying a cash dividend. Applied Digital’s contracts show what that flexibility costs. Lenders’ accounts reveal the other side of the transaction.

Documentary investigation as of 31 October 2026. All amounts are in current US dollars. Illustrative calculations are clearly separated from company disclosures.

During the quarter ended 31 August 2026, Applied Digital recorded $60.1 million of preferred dividends paid in kind within its TopCo2 financing structure. That remuneration did not leave the business as an ordinary cash dividend would have. Instead, the investor’s financial claim increased. The entry captures an important feature of the AI infrastructure build-out: payment can wait while the amount promised continues to grow. S01

The mechanism is known as payment-in-kind, or PIK. On a loan, interest increases the principal to be repaid. With preferred equity, a form of capital carrying priority rights, dividends can increase the investor’s entitlement ahead of ordinary shareholders. The economic resemblance is real, but the legal instrument and its place in the payment hierarchy matter. S04 S08

The documents offer a more useful finding than another sweeping estimate of “AI debt”. Preserving cash today can require a larger repayment, a minimum investment return or additional control rights tomorrow. The arrangement can also reach a successful exit: the specific PIK development loan identified at Applied Digital was repaid in full in May 2026. Following it through to repayment changes the story told by its original announcement. S07

Construction starts before the rent arrives

On 18 December 2025, Applied Digital announced financing for early work on new data-centre campuses: sourcing sites, planning, development and construction before leases were signed. The company described negotiations with a large, investment-grade customer and presented the facility as a way to advance suitable projects. That is the borrower’s commercial rationale. It also identifies a straightforward funding gap: development costs arrive before rental income. S02

The agreement signed by its DevCo subsidiary provided for an initial $45 million draw at 8% a year. During the first twelve months, interest would be added to principal on each monthly payment date. The lender accepted deferred cash collection as an original term of the deal. S03 S04

Each capitalisation gives the creditor a larger claim on the project. It does not necessarily involve a fresh transfer to the borrower’s bank account. When interest is described as being “paid with more debt”, the additional financing may arise under the existing contract rather than through a newly negotiated loan every month. The developer retains immediate liquidity while the amount ultimately due rises.

The original facility also contemplated a discretionary $55 million additional tranche. The 24 February 2026 amendment reorganised that amount: $40 million was actually drawn on that date, while $15 million remained conditional. S03 S07 Available capacity and money actually advanced belong in separate columns. Treating every possible draw as cash already received would overstate the financing used. S05

Method and scope

Contract and repayment dates. The 1.06/1.10/1.25 first-draw multiples are not annual rates. Some terms are redacted; no realised lender return is reconstructed.

Minimum returns add to the coupon

The lender also negotiated a minimum return on exit. For the first draw, the contract specifies reference multiples of 1.06, 1.10 or 1.25, depending on when repayment occurs. These are not annual interest rates. The contractual calculation incorporates specified payments already received and includes increases in principal arising from PIK in its denominator. S04

It would therefore be misleading to multiply the original $45 million by one of these coefficients and present the result as the actual repayment cost. Definitions, payment dates, partial repayments and fees all matter. Some information is redacted. This investigation does not reconstruct the lender’s realised annual return.

The economics are still intelligible. A lender committing resources to an early-stage development may seek a minimum reward even if the borrower exits relatively quickly. Earlier repayment reduces the time over which interest accrues, but a contractual floor can limit the saving. The headline coupon and the all-in financing cost answer different questions.

Applied Digital also guaranteed DevCo’s obligations, including the stipulated minimum return. The lender’s recourse extended beyond the construction project itself. The practical value of that protection would depend on the guarantor’s resources when needed; a legal claim cannot manufacture cash. S06

The outcome is documented. On 29 May 2026, the DevCo loan was repaid in full, including principal, accrued interest and the contractual return. Applied Digital’s annual report states that $9.4 million of interest and return was included in construction-in-progress costs. That combined figure cannot accurately be described as “$9.4 million of PIK interest”. As of this investigation’s cut-off, the historical loan is no longer an outstanding PIK balance awaiting repayment. S07

The repayment establishes that the creditor was paid. Attributing that payment to campus rental income would require a separate tracing of funds: an equity contribution or another financing can also settle a loan. This investigation does not reconstruct the economic source of the cash used for that exit.

Deferred remuneration also travels through equity

A separate part of Applied Digital’s financing remains visible in its recent accounts. Entities managed by Macquarie Asset Management invest in TopCo2 through preferred units and associated common units. The initial preferred dividend rate is 12.75% a year, accruing daily and compounding semi-annually. Subject to contractual exceptions, the issuer can elect cash or in-kind payment through 6 October 2035. Rate increases and other conditions can apply. S08

The accounts present this investment as a redeemable noncontrolling interest in temporary equity, rather than as an ordinary financial liability. The $60.1 million of PIK preferred dividends recorded for June–August 2026 belongs to this structure. It measures neither interest on a loan nor deferred remuneration across the AI industry. We do not annualise the quarter. S01

To understand the economic cost, follow the distribution rights. The contractual framework generally prioritises certain indemnities, then unpaid preferred dividends and payments up to the investor’s liquidation preference. Common holders share the remaining balance. Exceptions and project-finance restrictions apply. This ordering preserves cash during development while reserving more of the eventual distributions for the investor with priority rights. S08 S09

Method and scope

$60.1 m for June–August 2026, without annualisation. Initial 12.75% rate, daily accrual and semi-annual compounding. Distributions remain subject to contractual restrictions and exceptions. Sale rights can arise in 2032; cash/PIK elections extend to 2035 under specified conditions.

Time also changes the bargaining position. If the specified units remain outstanding on 6 October 2032, or if certain contractual trigger events are not cured, the investor can require a marketed sale process. An option to pay dividends in kind through 2035 therefore does not amount to an unconditional right to wait until then. The cash-payment timetable overlaps with a separate timetable of exit rights. S08 S09

For common shareholders, the risk has a distinctive shape. A completed campus may find tenants and retain considerable economic value while a growing share of that value belongs to the capital providers who financed the wait. Industrial success and the returns earned by each class of investor require separate analysis.

Three years of breathing room, 40.5% more debt

Consider a hypothetical transaction, deliberately stripped of company-specific terms. A business borrows $100 million at 12% a year for three years. It makes no principal repayments before maturity. All interest compounds annually, with no fees, taxes or payment failures.

After one year, the balance is $112 million. The following year’s interest is charged on that higher balance, taking the debt to $125.44 million. At the end of year three, $140.49 million is due. The cash-payment holiday has added $40.49 million to the final obligation. These are l0g calculations from stated assumptions, reproducible in the simulator below. M01

With fully cash-paid annual interest at the same rate, the debt would remain $100 million and the borrower would have paid $36 million of coupons over three years. With half the interest paid in cash and half added to principal, cumulative cash coupons would be $19.10 million and the terminal debt $119.10 million.

Comparing the final totals alone would miss the time value of money. Provided every promised payment is made, all three structures give the lender a 12% annual return in this model. The difference between $136 million of cumulative payments in the all-cash case and $140.49 million in the all-PIK case also compensates for receiving money later. A real PIK option may come with a higher rate or additional protections. Keeping the rate identical here isolates the effect of payment timing. M01

Method and scope

$100 m initial principal, three years, annual compounding and no interim principal repayments. Cumulative cash coupons:$36 m/$19.10 m/$0 m; terminal debt:$100 m/$119.10 m/$140.49 m. Promised yield remains 12% if every payment is made. Excludes fees, tax and default.

The next question is whether the business has developed enough repayment capacity during the interval. Suppose a replacement lender will provide debt equal to four times a reference operating earnings figure of $30 million. That hypothetical rule permits $120 million of refinancing. The PIK balance is $140.49 million, leaving a $20.49 million funding gap.

At the same four-times multiple, reference earnings would need to reach $35.12 million to accommodate the entire balance. A lender willing to advance five times $30 million could cover it. These sensitivity tests use assumed lending rules; actual financing depends on each lender’s criteria and agreed terms. The companion calculator allows them to be changed.

The earnings measure is EBITDA: earnings before interest, taxes, depreciation and amortisation. EBITDA serves as the basis for an assumed lending limit. Measuring cash available for debt service requires a separate assessment. Maintenance, further investment, tax and working capital can absorb substantial cash. A real credit decision would need to assess those demands alongside customer contracts, collateral and repayment schedules.

Method and scope

$100 m initial debt at 12%, all-PIK over three years. Assumed lending capacity:$30 m EBITDA multiplied by 4. EBITDA needed at the same multiple:$35.12 m. This is a teaching assumption; EBITDA differs from available cash.

More time can raise the hurdle. Extending the all-PIK loan by another year in this example adds $16.86 million, taking the balance to $157.35 million. The extension preserves another year of liquidity while increasing the amount that operations, a sale or new funding must eventually cover. Interest accumulation creates that mismatch even with unchanged compute prices. M01

l0g / DEFERRED INTEREST / LOCAL CALCULATOR

Change the cost of waiting

A fictional loan with interest paid in cash or added to the debt once a year. All amounts are USD millions.

Change the six assumptions

Hypothetical model M01 inputs

Initial principal ($m)$0.1m to $100,000mTotal annual rate (%)0% to 40% per yearTerm (years)1 to 10 whole yearsCash share of interest (%)0% to 100%, whole percentageExit EBITDA ($m)$0m to $100,000mRefinancing multiple0.1 to 20 times

Restore fictional example

Final debt

140.49

USD m

Cumulative cash coupons

0.00

USD m

Funding needed beyond the new loan

20.49

USD m

EBITDA needed at the selected multiple

35.12

USD m

Inspect annual cash flows

Hypothetical annual cash flows in USD millions

Year	Opening debt	Cash interest	Added PIK	Closing debt
1	100.00	0.00	12.00	112.00
2	112.00	0.00	13.44	125.44
3	125.44	0.00	15.05	140.49

Assumptions and method

At each year-end: interest = opening debt × rate; cash coupon = interest × cash share; closing debt = opening debt + interest retained in the loan. At exit, refinancing capacity = EBITDA × multiple. The funding need is the portion of final debt above that capacity.

The model excludes fees, taxes, default, interim principal repayments and minimum-return clauses. Its fictional assumptions are distinct from Applied Digital’s contracts. The multiple is a lending assumption. EBITDA is earnings before interest, taxes, depreciation and amortisation, distinct from cash available.

Calculations use double precision; amounts are rounded to two decimals after calculation. Sums of displayed amounts may differ slightly from independently rounded totals.

Calculations run in this page. Inputs stay in memory while it is open.

On the lender’s side, an income entry appears

Deferred payment has a counterpart in the financier’s accounts. Blue Owl Technology Finance, a technology-focused lending vehicle, separately reports PIK interest and PIK dividends. For the second quarter of 2026, it recorded $25.224 million of PIK interest against $338.032 million of total investment income, or approximately 7.46%. Adding $17.062 million of PIK dividends brings the combined share to 12.51%. S10

This example illustrates accounting on the creditor’s side. It establishes no financing relationship between OTF’s portfolio and DevCo. Technology-related borrowers do not all become AI businesses merely because of a sector label. The denominator is recognised investment income before the vehicle’s expenses, rather than net profit or cash collected.

Nor should the remaining income be labelled “cash received” in a chart. Interest scheduled for cash payment may have been recognised before collection. The reliable distinction in these figures is between income explicitly identified as PIK and other recognised investment income. S10

Method and scope

$25.224 m PIK interest plus $17.062 m PIK dividends on $338.032 m of investment income. The remaining $295.746 m is other recognised income, whose collection requires separate evidence. Technology portfolio; no lending link to DevCo is inferred.

OTF’s accounting policy ties income recognition to collectibility. When collection becomes doubtful, an investment can be placed on non-accrual, with some accrued amounts reversed. Its stated risks also include incentive fees that may be based on PIK income before that income is received in cash. These are disclosed policies and risks. They do not establish that any particular income entry is fictitious or will ultimately be lost. S11

The liquidity mismatch nevertheless deserves attention. A lender can report more income while receiving less immediate cash from some borrowers. Its own interest payments, expenses and distributions may continue to require cash. Managing the difference depends on receipts from other investments, reserves, repayments and access to funding. Assessing the vehicle requires recognised returns to be reconciled with collections and the value of the underlying claims.

Capitalised interest can still be paid in cash

Infrastructure accounting creates another linguistic trap. A business can include interest in the cost of an asset under construction while paying that interest in cash. Capitalising a cost determines where it appears in the financial statements. PIK determines how the creditor is compensated on the relevant payment date.

CoreWeave provides a particularly clear test. For the first half of 2026, it disclosed $982 million of cash interest payments, including $176 million of capitalised interest. The $176 million is already inside the $982 million. The remaining $806 million appears in cash-flow disclosures excluding capitalised amounts. Describing the $176 million as “unpaid interest” would reverse what the filing says. S13

Method and scope

$176 m is already included in $982 m. Adding interest to asset cost and paying a creditor in kind describe different treatments. Consolidated six-month amounts in nominal dollars, without annualisation.

Its annual debt note also separates the two categories. PIK interest expense was $22 million in 2023 and zero in both 2024 and 2025, while interest capitalised into asset costs was $182 million in 2025. This refutes a specific conflation of accounting lines. It does not purport to measure every possible form of deferred remuneration at CoreWeave at every subsequent date. S12

The distinction is consequential. Confusing these treatments can turn documented cash payments into a story about creditors going unpaid. Conversely, preferred equity can accumulate a significant economic claim without appearing in the line where a reader looks for loan interest expense.

Private-credit evidence is broader than AI

Research published on 5 August 2026 by three economists at the Federal Reserve Bank of Boston offers a broader comparison. Their study uses disclosures from 168 business development companies, or BDCs, covering nearly 890,000 company-quarter loan observations. In the sample, the share of loans with active PIK usage rose from approximately 6% in early 2022 to roughly 10% in early 2026. Unexercised PIK options are excluded from that measure. S14

The authors find increases across many industries, consistent with greater pressure on cash flows. Their sample covers lending reported by BDCs across several industries. The conclusions express the authors’ views and retain that scope, distinct from AI infrastructure alone. The share of borrowers using PIK, the share of loans with PIK and the share of income recognised as PIK are also different measures.

The Federal Reserve’s May 2026 Financial Stability Report uses careful language: elevated PIK usage can indicate repayment difficulties among some borrowers even when recorded defaults remain relatively low. That distinction matters. Deferring a payment in accordance with a contract can keep the loan current without demonstrating that its eventual repayment has become easier. S15

The public documents assembled here do not establish the proportion of AI financing that relies on PIK, or a future default rate. They do identify particular agreements, how financial claims accumulate and the moments when cash will have to take over.

Who bears the cost of waiting?

The strongest case for PIK is economically coherent. Preserving the resources needed to complete a viable project may create more value than immediately reducing its debt. A structure requiring cash coupons before rent starts could force the developer to raise more equity or slow construction. PIK can help a project move from development to operation. The documented repayment of DevCo’s loan demonstrates that such an exit is possible. S02 S07

The weakness emerges when the time purchased fails to produce the anticipated payment capacity. A delivery delay can postpone receipts while financial claims continue growing. A rent renegotiation can reduce the value a new lender is willing to finance. Tighter credit conditions can demand more equity just as investors become less willing to supply it. These scenarios describe transmission channels to test against each project’s own contracts and cash flows.

Common shareholders may bear the first economic adjustment: a fresh equity contribution, a smaller share of distributions or an earlier sale than they had hoped for. The precise ordering depends on the agreement and applicable law. If recoverable value falls far enough, creditors can also incur losses. A parent guarantee can expand legal recourse without eliminating the economic loss that has to be allocated.

It also matters whether PIK was part of the original structure or introduced after operating performance deteriorated. In the first case, deferral belongs in the initial construction and funding plan. In the second, it changes the response to an existing difficulty. An amendment can preserve value by avoiding a rushed liquidation; repeated extensions can also postpone recognition of a problem. Successive contracts and observed cash flows are more informative than the PIK label alone.

Ultimately, the relevant comparison is between the growth of financial claims and the project’s ability to meet them. DevCo’s loan exit is documented. TopCo2’s accumulating preferred remuneration and exit rights still need to be followed through subsequent disclosures. Across the AI industry, the answer remains dispersed among individual agreements and balance sheets. The useful investigation stays at that level: obligations actually signed, money actually received and the dates on which payment is required.

Further reading

AI compute prices and GPU debt repayment examines renewal cash flows. Private credit and software’s AI exposure explores lenders’ recognised income. The definitions of PIK and EBITDA explain the main calculations.

Method and limitations

This article draws on public agreements, regulatory filings, company accounts and two Federal Reserve publications. No interviews with the companies or lenders were conducted. Commercial assertions are attributed; filing a document with the SEC does not mean the regulator endorses every assumption in it. Redactions and undisclosed cash flows prevent reconstruction of some realised investment returns. The references distinguish publication dates, transaction dates and reporting periods. No industry-wide estimate of AI-related PIK is advanced.

M01 · l0g illustrative model. Initial principal $100 million, total annual interest rate 12%, three years, no interim principal amortisation, annual compounding of the PIK portion. Each period: interest = opening debt × rate; cash payment = interest × cash share; closing debt = opening debt + interest not paid in cash. Hypothetical refinancing capacity = EBITDA × lending multiple. The funding gap is the larger of zero and final debt less that capacity. Fees, taxes, defaults, minimum-return clauses and discounted project valuation are excluded. The simulator above reproduces the calculations from these stated assumptions. The calculator implements this model rather than any company’s financing agreement.

Sources and references

Sources accessed on 31 October 2026. Each reference identifies the document, reporting period and limits of the evidence.

1. S01 · Applied Digital · 2026-10-07 · Accessed: 31 October 2026Applied Digital, quarterly report to 31 August 2026

   Applied Digital, quarter ended 31 August 2026. Note 16, pp. 31–32: PIK preferred dividends and temporary-equity classification.

   Passages and scope

   Source and period retain their stated scope; company disclosures are attributed to the issuer.

2. S02 · Applied Digital · 2025-12-18 · Accessed: 31 October 2026Applied Digital, DevCo financing release

   Applied Digital, development facility announcement. Issuer’s stated rationale for financing work before leases are signed.

   Passages and scope

   Source and period retain their stated scope; company disclosures are attributed to the issuer.

3. S03 · Applied Digital · 2025-12-22 · Accessed: 31 October 2026Applied Digital, DevCo financing filing

   Applied Digital, current report on the 18 December 2025 DevCo facility. Initial draw and payment terms.

   Passages and scope

   Source and period retain their stated scope; company disclosures are attributed to the issuer.

4. S04 · APLD DevCo / Macquarie Equipment Capital · 2025-12-22 · Accessed: 31 October 2026APLD DevCo, initial promissory note

   DevCo promissory note, Exhibit 10.1. Sections 2(e), 2(f), and Annex A: Base Return and Multiple on Invested Capital. Some information is redacted.

   Passages and scope

   Redacted contract information remains unavailable. Economic terms were checked against the issuer’s summaries; no realised annual return is reconstructed.

5. S05 · APLD DevCo / Macquarie Equipment Capital · 2026-04-08 · Accessed: 31 October 2026APLD DevCo, amended promissory note

   The original discretionary $55 million tranche was reorganised into $40 million drawn on 24 February 2026 and a conditional $15 million tranche.

   Passages and scope

   Source and period retain their stated scope; company disclosures are attributed to the issuer.

6. S06 · Applied Digital · 2025-12-22 · Accessed: 31 October 2026Applied Digital, DevCo parent guarantee

   Applied Digital parent guarantee, Exhibit 10.2, section 2. Guarantees the specified DevCo obligations.

   Passages and scope

   Source and period retain their stated scope; company disclosures are attributed to the issuer.

7. S07 · Applied Digital · 2026-07-29 · Accessed: 31 October 2026Applied Digital, annual report to 31 May 2026

   Applied Digital, fiscal year ended 31 May 2026. Debt note: DevCo repaid 29 May; combined interest and return included in construction costs.

   Passages and scope

   Source and period retain their stated scope; company disclosures are attributed to the issuer.

8. S08 · Applied Digital · 2025-10-09 · Accessed: 31 October 2026Applied Digital, TopCo2 investment terms

   Applied Digital current report, 9 October 2025. Item 1.01 summarises preferred-equity economics, distributions and exit rights.

   Passages and scope

   Source and period retain their stated scope; company disclosures are attributed to the issuer.

9. S09 · APLD HPC TopCo 2 LLC · 2025-10-09 · Accessed: 31 October 2026APLD HPC TopCo2, LLC agreement

   TopCo2 amended LLC agreement, dated 6 October 2025. Articles V and VII, including redemption and forced-sale rights. Redacted terms are not reconstructed.

   Passages and scope

   Redacted contract information remains unavailable. Economic terms were checked against the issuer’s summaries; no realised annual return is reconstructed.

10. S10 · Blue Owl Technology Finance (OTF) · 2026-08-05 · Accessed: 31 October 2026Blue Owl Technology Finance, second-quarter results

    OTF second-quarter results. Three months ended 30 June 2026; Consolidated Statements of Operations, amounts originally in thousands of dollars.

    Passages and scope

    Source and period retain their stated scope; company disclosures are attributed to the issuer.

11. S11 · Blue Owl Technology Finance (OTF) · 2026-02-18 · Accessed: 31 October 2026Blue Owl Technology Finance, 2025 annual report

    Income recognition, recoverability, non-accrual and risks of fees based on PIK income. Relevant passages read directly in the SEC filing.

    Passages and scope

    Accrued income and cash received have different scopes. A stated accounting policy does not establish that a particular receivable is fictitious or permanently lost.

12. S12 · CoreWeave · 2026-03-02 · Accessed: 31 October 2026CoreWeave, 2025 annual report

    CoreWeave 2025 annual filing, Debt note, p. 114. PIK interest expense and capitalised interest are distinct lines.

    Passages and scope

    Source and period retain their stated scope; company disclosures are attributed to the issuer.

13. S13 · CoreWeave · 2026-08-12 · Accessed: 31 October 2026CoreWeave, June 2026 quarterly report

    CoreWeave June 2026 quarterly filing: cash-flow supplement and risk factors p. 93; six-month interest payments including capitalised amounts.

    Passages and scope

    Source and period retain their stated scope; company disclosures are attributed to the issuer.

14. S14 · Fillat, Shen et Wang / Federal Reserve Bank of Boston · 2026-08-05 · Accessed: 31 October 2026Boston Fed researchers, early warnings in private credit

    Boston Fed researchers Fillat, Shen and Wang, 5 August 2026. BDC loan sample, actual PIK use and measurement limitations. Views of the authors.

    Passages and scope

    BDC loan sample, distinct from the whole private-credit market or AI alone. Unexercised PIK options excluded; views of the authors rather than an institutional position.

15. S15 · Board of Governors of the Federal Reserve System · 2026-05-08 · Accessed: 31 October 2026Federal Reserve, May 2026 Financial Stability Report

    Federal Reserve Financial Stability Report, May 2026, printed p. 19 (PDF page 27). Page visually checked; information cut-off 23 April 2026.

    Passages and scope

    Aggregate, qualified risk diagnosis. No estimate of AI-specific PIK prevalence is supplied.