Software giant Oracle Corporation is witnessing a dramatic surge in the cost of protecting its debt against default, reaching levels not seen since 2021. The spike comes as nervous investors and lenders scramble to hedge against the billions of dollars the company is pouring into artificial intelligence infrastructure.
Credit Protection Costs Spike Dramatically
The financial markets reacted strongly on Friday as Oracle's five-year credit default swaps jumped 13.5 basis points to 101.68 basis points. According to ICE Data Services, this represents the most significant single-day increase since December 2021. Credit default swaps function as insurance against corporate default, with rising prices indicating declining investor confidence in a company's creditworthiness.
Bloomberg Intelligence analyst Rob Schiffman identified the primary drivers behind this worrying trend. Concerns that Oracle's increasing leverage could push its credit ratings into junk territory, combined with hedging activities related to tens of billions in AI debt financing, are creating substantial market pressure.
"With near-term expenses rising, yet related revenues not realized for a few years, concerns are justified," Schiffman stated in emailed commentary, highlighting the fundamental risk investors are pricing into Oracle's debt instruments.
Massive AI Ambitions Drive Unprecedented Spending
Oracle's aggressive push into artificial intelligence forms the backdrop to these financial market developments. The company has partnered with OpenAI and SoftBank Group Corp. to launch Project Stargate, an ambitious initiative requiring approximately $500 billion in AI infrastructure investment.
As part of this massive undertaking, a consortium of approximately 20 banks is providing an $18 billion project finance loan specifically for constructing a data center campus in New Mexico. Oracle will eventually take over this facility as the primary tenant. Separately, the company raised significant capital through $18 billion in US high-grade bonds sold in September to fuel its AI expansion plans.
Analysts Project Soaring Debt Levels
Morgan Stanley analysts anticipate continued hedging activity by Oracle's bondholders and lenders in the near term. Their projections indicate the company's financial leverage will increase substantially, with net adjusted debt expected to more than double to roughly $290 billion by fiscal year 2028, up from approximately $100 billion currently.
In a Friday research note, Schiffman and BI colleague Alex Reid observed that questions about future revenue and cash-flow generation from AI infrastructure investments are broadly affecting technology stock and bond prices across the sector.
Despite the growing caution, market sentiment hasn't completely turned negative. "Though we see rising risk and further tech-debt underperformance, concerns about a bubble appear over hyped, for now," the analysts wrote, suggesting that while risks are mounting, the situation hasn't reached crisis levels.
The financial markets will closely watch how Oracle manages the balance between its enormous AI ambitions and the associated debt burden that has investors increasingly concerned about credit quality deterioration.
