Oracle Debt Spreads Hit Junk Territory as AI Costs Mount

Oracle's debt has become a focal point of concern for investors and analysts as its bonds, once rated as investment grade, now trade like junk. The company's aggressive spending on artificial intelligence infrastructure is fueling fears that its financial obligations may outpace returns.

Oracle recently revealed it has pushed back the completion dates for some data centers linked to its AI projects, further stoking doubts about its near-term profitability.

The selloff in Oracle's bonds has been sharp. Paper losses for investors who bought the $18 billion in high-grade notes issued in September now total about $1.35 billion. Bond spreads have widened significantly, with the yield on Oracle's 5.2% notes maturing in 2035 reaching 5.9%, surpassing the average yield for junk-grade bonds. The company's five-year credit default swaps have climbed to a 16-year high, according to Bloomberg.

Oracle's debt situation is worsening as it accelerates its spending on AI infrastructure. The company's capital expenditures for fiscal 2026 are now expected to reach $50 billion, up from $35 billion previously. This surge in outlays is largely driven by its contract with OpenAI, which accounts for most of Oracle's $523 billion in remaining performance obligations. Analysts warn that Oracle's reliance on a single customer - despite the size of the contract - increases its vulnerability to shifts in market demand or financial instability at OpenAI according to Economic Times.

Why the Standoff Happened

Oracle's financial challenges stem from its rapid pivot to AI and cloud infrastructure. The company entered this market later than its peers, such as Amazon, Microsoft, and Google, and has had to invest heavily to catch up. Its $300 billion deal with OpenAI, announced in September, has become a double-edged sword. While it solidified Oracle's role as a key player in the AI industry, it also forced the company to borrow aggressively to fund the data centers required to support its partner's needs.

The debt load has grown to $108 billion, up from $92.6 billion in May 2025. Oracle recently issued $18 billion in bonds at a premium of 1.71 percentage points above comparable Treasuries. The high borrowing costs reflect the market's skepticism about Oracle's ability to generate sufficient free cash flow to service its debt. The company's free cash flow has turned negative in recent quarters, with a loss of $13 billion over the past 12 months.

How Markets Reacted

Oracle's stock has taken a hit as the market reassesses its financial outlook. Shares have fallen nearly 35% over the past three months and plunged 14% on Thursday following weaker-than-expected earnings. The decline has been sharper than that of other tech giants, which are also investing in AI but have stronger cash flows and credit ratings. Oracle's five-year credit default swaps now trade at 135 basis points, more than four times the level of its peers.

The company's debt crisis has drawn the attention of credit rating agencies. Both S&P and Moody's have issued negative outlooks for Oracle, citing the risks associated with its capital-intensive AI investments. Moody's noted that Oracle has the weakest credit metrics among investment-grade hyperscalers and the highest exposure to OpenAI. The bond market is pricing in a higher probability of default, with the cost of protecting Oracle's debt against default reaching 151.3 basis points on Friday - the highest level since 2009.

What Analysts Are Watching

Analysts are closely watching Oracle's ability to manage its leverage while maintaining its investment-grade rating. The company has signaled that it will prioritize meeting its obligations, but its reliance on external financing raises questions about its long-term sustainability. JPMorgan analysts suggested that Oracle may need to cut its dividend, set a leverage target, or raise equity to alleviate concerns about its financial health.

One of the biggest unknowns is whether Oracle's AI investments will translate into sustainable revenue. The company has yet to recognize a significant portion of its $523 billion in contracted revenue. If OpenAI's demand for computing power slows or its ability to pay for it diminishes, Oracle could be left with underutilized and expensive infrastructure. This scenario has raised concerns about a broader AI bubble, with investors questioning whether the returns will justify the costs.

Oracle's management has defended its strategy, stating that its data center expansion is on track and that it remains confident in its ability to deliver on its commitments. Co-CEO Clay Magouyrk emphasized that the company is "carefully evaluating all future infrastructure investments" to ensure profitability according to Bloomberg. However, the bond market remains skeptical, with Oracle's debt now trading at levels typically associated with high-yield bonds.

Oracle's situation highlights the risks associated with the AI infrastructure boom. While the technology promises transformative potential, the capital required to build it is pushing even well-established companies into high-risk financial territory. As Oracle's debt burden grows and its bond spreads widen, the market is sending a clear message: investors are demanding more tangible results from its AI investments before they'll be willing to extend their trust according to Fortune.