Oracle’s debt risk metrics hit a three-year high in November, and things will only get worse in 2026 unless the database giant can allay investor fears about big spending on artificial intelligence, according to Morgan Stanley.
Lack of cash, a bloated balance sheet and obsolescence risk are just some of the dangers facing Oracle, according to Lindsey Tyler and David Hamburger, the company’s credit analysts. Oracle Corp.’s cost of insuring against default over the next five years rose to 1.25 percentage points annually on Tuesday, according to ICE Data Services.
The price of five-year credit default swaps is at risk of breaking a record set in 2008, it warned in a note on Wednesday, as concerns about the company’s borrowing overload to finance its AI ambitions continue to spur intense hedging by banks and investors.
Credit default swaps could top 1.5 percentage points in the short term and could approach 2 percentage points if communication on funding strategies remains limited as the new year progresses, analysts wrote. In 2008, Oracle’s credit default swaps reached a record 1.98 percentage points, according to ICE Data Services.
A representative for Oracle declined to comment.
Oracle is one of the companies participating in the AI spending race that has quickly turned the giant data center into a barometer of AI risk in credit markets. The company borrowed $18 billion in the U.S. luxury market in September. Earlier this month, a group of about 20 banks arranged about $18 billion in project finance loans to build a data center campus in New Mexico that Oracle will take over as a tenant.
Bloomberg reported last month that the bank is offering a separate $38 billion financing package to help fund construction of data centers in Texas and Wisconsin developed by Vantage Data Centers. The lenders involved in these Oracle-related construction loans are likely the primary driver of Oracle’s recent surge in credit default swap volumes, and this trend is likely to continue, according to Morgan Stanley.
“Over the past two months, it has become more apparent that reports of ongoing construction financing for Oracle’s future tenant sites could provide even greater driver for recent and future hedging,” the analysts wrote.
If banks distribute these loans to other parties, they write, there is a risk that some of the bank’s hedges may come undone. Still, other parties may hedge at some point, even if the demand for construction debt financing does not end in the future after the Vantage and New Mexico sites.
Analysts said last month that they expect short-term credit deterioration and uncertainty to prompt further hedging by bondholders and lenders.
“Both corporate bondholder hedging dynamics and thematic hedging dynamics are likely to gain importance in the future,” they added.
Oracle’s credit default swaps have underperformed the broader investment-grade CDX index, and Oracle’s corporate bonds have underperformed Bloomberg’s high-grade index amid surging demand for hedging and weakening sentiment. Concerns are also starting to weigh on Oracle stock, which analysts said could motivate management to outline its financing plans, including details on Stargate, data centers and capital spending, on its next earnings call.
Analysts had previously recommended that investors buy Oracle bonds and credit default swaps in so-called basis trades to profit from the expectation that credit derivatives would be wider than bonds. They now argue that buying credit default swaps outright is a cleaner deal.
“We therefore close out the ‘bond buy’ portion of the basis trade and maintain its ‘CDS protection buy’ portion,” they wrote. “We believe full CDS trading is cleaner at this point and will lead to wider spreads.”
Larry Ellison, chairman of Oracle’s board of directors, also supports his son and said he is considering offers from Netflix and Comcast.
Mutua writes for Bloomberg.
