Oracle's AI Bet Sends Credit Protection Costs Soaring
The cost of insuring Oracle Corporation's debt against default has experienced its sharpest increase since December 2021, as nervous investors and lenders scramble to protect themselves against the software giant's massive artificial intelligence investments. According to ICE Data Services, the spread on Oracle's five-year credit default swaps jumped 13.5 basis points on Friday to reach 101.68 basis points, marking the most significant single-day surge in nearly four years.
Massive AI Spending Drives Investor Concerns
Oracle, traditionally known for its database software, is spearheading the ambitious Stargate project alongside OpenAI and SoftBank Group Corp.—a $500 billion initiative to build advanced AI infrastructure. As part of this effort, approximately 20 banks are providing an $18 billion project finance loan to construct a data centre campus in New Mexico, which Oracle will eventually occupy as tenant. Additionally, the company sold $18 billion of US high-grade bonds in September to fund its AI expansion.
Bloomberg Intelligence analyst Rob Schiffman noted that worries about Oracle's rising leverage potentially pushing its credit ratings into junk territory, combined with hedging activities related to tens of billions in AI debt financing, are likely driving the credit default swap increases. "With near-term expenses rising, yet related revenues not realized for a few years, concerns are justified," Schiffman stated in emailed commentary.
Long-Term Debt Projections Signal Continued Volatility
Morgan Stanley analysts predict that Oracle's hedging activity will continue in the near term, with the firm's net adjusted debt projected to more than double to approximately $290 billion by fiscal year 2028, up from around $100 billion currently. As AI infrastructure spending accelerates across the technology sector, questions about future revenue generation and cash flow have broadly impacted stock and bond prices throughout the industry.
Despite the growing caution, Bloomberg Intelligence analysts Schiffman and Alex Reid suggest that while they see rising risk and further technology debt underperformance, concerns about an AI bubble might be overstated—at least for now. "Though we see rising risk and further tech-debt underperformance, concerns about a bubble appear over hyped, for now," the analysts wrote in a Friday research note.
A representative for Oracle declined to comment on the credit derivative movements or the company's AI investment strategy. The situation highlights the broader market tension between excitement about artificial intelligence's potential and concerns about the massive capital expenditures required to compete in the rapidly evolving sector.
