(Bloomberg) – The cost of protecting Oracle’s debt from default has soared to the highest level since 2021, as investors and lenders nervous about hedging the billions the software giant is plowing into artificial intelligence scramble.
Oracle, known for its database software of the same name, saw its five-year credit default swap spread rise 13.5 basis points to 101.68 basis points on Friday. This is the biggest rebound since December 2021, according to ICE Data Services.
Credit default swap prices typically rise as investor confidence in a company’s creditworthiness declines. Rob Shiffman of Bloomberg Intelligence said the rise was likely driven by concerns that Oracle’s increased leverage would push the company’s credit rating above the junk cliff, as well as hedging related to tens of billions of dollars in AI debt financing.
“While short-term spending has increased, the concerns are justified as the associated revenue has not been realized for several years,” Schiffman said in an emailed commentary.
Oracle, along with OpenAI and SoftBank Group Corp., is spearheading Stargate, a project that will rapidly invest $500 billion in building AI infrastructure. As part of that effort, a club of about 20 banks is providing about $18 billion in project finance loans for the construction of a data center campus in New Mexico that Oracle will take over as a tenant. Separately, Oracle sold $18 billion of high-grade U.S. bonds in September to increase spending to meet the needs of the AI boom.
Morgan Stanley analysts said last month that Oracle’s bondholders and lenders were likely to remain hedged in the short term. They expect the company’s adjusted net debt to more than double from about $100 billion to about $290 billion by fiscal 2028.
As spending on AI infrastructure increases, questions about future revenue and cash flow generation are broadly influencing stock and bond prices, Schiffman and BI’s Alex Reid wrote in a note Friday.
Investors are becoming more cautious, but sentiment has not completely changed. “While we see rising risks and further deterioration in the performance of tech debt, concerns about a bubble appear to be overblown for now,” the analysts said.
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