Oracle's bonds are sitting close to junk territory as markets cool on artificial intelligence. The cost of insuring its debt against default has climbed, and a further credit downgrade could push its borrowing costs higher. Some analysts and fixed income investors say they are not yet concerned.
Oracle's five-year credit default swap spread stands at 295 basis points, after briefly hitting 300 bps on Thursday. That is up 287% in one year, and it comes as much of the AI trade fizzled last week, led by CoreWeave.
Why Oracle differs from CoreWeave
Unlike CoreWeave, Oracle is investment grade, while CoreWeave is already in junk territory. Even so, Gavan Nolan of S&P Global Market Intelligence said the CDS range is more in line with BB and B credit, which is high yield.
S&P Credit Ratings rates Oracle BBB-, the lowest level in the investment-grade spectrum. The agency downgraded the company in July, noting that its rapidly expanding infrastructure business is increasing its overall credit risk.
Oracle funds its buildout with debt
Oracle is moving into data centers and cloud services, including a $300 billion deal with OpenAI. To fund the buildout, it has issued $118 billion in long-term debt and has another $39 billion in capital and lease obligations, according to FactSet data.
Meanwhile, analysts estimate free cash flow of -$23.7 billion this year and -$36 billion in 2027, according to consensus forecasts. Deutsche Bank's Jim Reid called Oracle a bellwether for AI and wrote in a report that a downgrade into junk would "risk pressuring IG-only investors into forced sales".
Analysts and investors voice confidence in Oracle
Jamie Meyers of Laffer Tengler, which owns Oracle stock, said a junk rating would change how cheaply Oracle can borrow. He said he is not concerned about the debt levels. Brad Collins of Vanguard also expressed confidence in Oracle and the other hyperscalers.
Oracle said maintaining an investment grade rating is its first priority as a company.
Source: CNBC
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