Oracle's 5-Year CDS Hit 16-Year High as AI Debt Concerns Weigh on Credit Outlook

Oracle's Debt-Laden AI Expansion Raises Investor Concerns

Oracle's debt-laden expansion into artificial intelligence is spooking investors, with its bonds trading like junk as spreads widen and credit risk surges. The company's five-year credit default swaps (CDS) have hit record levels, signaling growing concerns about its ability to service its ballooning $108 billion debt load. The surge in CDS prices reflects a shift in sentiment as the market questions whether Oracle can sustain its aggressive AI infrastructure spending.

Oracle's CDS spreads recently climbed to 135 basis points, a 50% increase in a month and four times higher than those of peers like Microsoft and Amazon. This has made Oracle one of the most actively traded names in the CDS market, with analysts pointing to thin trading volumes as a factor amplifying price swings according to recent reports. The widening spreads indicate investors are pricing in higher default risk as Oracle continues to borrow heavily to fund data centers for AI.

The company's capital expenditures have surged to $50 billion in its current fiscal year, up from $35 billion previously, as it builds out infrastructure for clients like OpenAI according to financial analysis. Oracle's reliance on OpenAI is now a major concern, with more than half of its $523 billion in remaining performance obligations tied to the ChatGPT developer according to market research. Analysts have noted this exposure as a key risk, particularly given OpenAI's unprofitable status and lack of clear funding plans according to analyst reports.

How Markets Reacted

Oracle's stock has plummeted nearly 35% over the past three months, compounding worries about its financial health. The selloff accelerated after a Bloomberg report revealed the company pushed back the completion of some OpenAI data centers from 2027 to 2028 due to labor and material shortages. This delay, along with Oracle's recent earnings report showing a $10 billion free cash flow loss in the latest quarter, has intensified concerns about its leverage according to financial analysis.

Investor anxiety is also evident in the bond market, where Oracle's 5-year CDS reached a 16-year high according to market data. The cost to insure against a default has more than doubled since October, outpacing even the broader investment-grade CDS index. This widening divergence suggests investors see Oracle as a unique risk in the AI debt boom, rather than just a reflection of industry-wide trends.

What Analysts Are Watching

Credit ratings agencies S&P and Moody's have both downgraded their outlooks for Oracle, citing the drag on free cash flow from cloud infrastructure spending. Moody's described Oracle as having the weakest credit metrics among investment-grade hyperscalers according to market analysis. The agency's concerns highlight a growing skepticism over the sustainability of Oracle's AI investment strategy, particularly as it continues to borrow heavily to fund construction projects.

Oracle's financing strategy is also under scrutiny. The company raised $18 billion in bonds in September and is expected to raise $20 billion to $30 billion annually for the next three years to fund its expansion according to financial reports. Analysts are watching closely to see whether Oracle will pursue alternative funding options, including foreign investment or vendor financing with companies like Nvidia, which could reduce upfront capital costs according to market analysis. However, such arrangements come with their own risks, such as GPU depreciation and reliance on key suppliers.

Credit analysts at Barclays and Morgan Stanley have advised clients to buy Oracle's five-year CDS as a hedge according to market analysis. Morgan Stanley's own models predict further widening of spreads, potentially reaching 150 basis points if uncertainty over Oracle's financing plans persists. The growing interest in CDS trading reflects a broader market trend of using derivatives to hedge against the risks of the AI investment boom.

Risks to the Outlook

Oracle's heavy borrowing and cash burn raise questions about its ability to maintain its investment-grade credit rating according to market analysis. While management has reiterated its commitment to preserving this status, analysts remain skeptical. The company's leverage has increased significantly, and its free cash flow has turned negative, with capital expenditures outpacing operating cash flow according to financial data. If Oracle's AI infrastructure contracts fail to translate into revenue as expected, the company could face a funding gap that would force it to seek additional debt or equity financing, further straining its balance sheet.

Investor confidence is also shaken by the broader AI market's volatility. A growing number of investors are reassessing valuations in the sector, particularly after Oracle's stock erased its September gains according to market reports. The fear is that the current AI boom may be overinflated, and companies like Oracle, with their high debt levels and uncertain revenue streams, could be the first to face a correction.

As Oracle navigates these challenges, its financial strategy will remain a key focus for credit markets. The company's ability to convert its AI infrastructure contracts into revenue will be critical in determining whether its current debt burden is sustainable-or if it's on the path to default.