Credit traders are increasing protection against Oracle Corp. defaulting on its debt. This trend comes as the technology giant invests billions into artificial intelligence infrastructure. Analysts at Morgan Stanley anticipate this situation will continue in the near term.
The cost to insure against a default on Oracle's debt over the next five years has reached levels not seen since October 2023. This indicates growing concern in the financial markets regarding the company's aggressive AI investment strategy.
Key Takeaways
- Cost to insure Oracle debt against default is near its highest since October 2023.
- Morgan Stanley expects Oracle's net adjusted debt to more than double to $290 billion by fiscal year 2028.
- Oracle is investing $500 billion in AI infrastructure, including the Stargate project with OpenAI.
- A $38 billion debt offering is underway to fund new AI data centers.
Oracle's Debt Projections and Market Reaction
Morgan Stanley projects a significant increase in Oracle's net adjusted debt. They expect it to more than double from around $100 billion to approximately $290 billion by fiscal year 2028. This projection has led the firm to recommend that investors buy the company’s five-year Credit Default Swaps (CDS) and its five-year bonds.
The company’s 4.9% bonds, set to mature in February 2033, saw their yield spread widen by 26 basis points to 83 basis points. This movement, recorded by Trace, reflects the market's response to the heightened risk perception.
“Near-term credit deterioration and uncertainty may drive further bondholder and lender hedging,” Morgan Stanley analysts Lindsay Tyler and David Hamburger noted in a recent report.
Debt Protection Costs
The cost to insure against Oracle's debt default over five years is currently hovering near its highest point since October 2023, according to ICE Data Services. This metric is a key indicator of investor confidence.
Financing the AI Ambition
Investors are moving to safeguard their positions as banks prepare to launch a massive $38 billion debt offering. This significant deal will help fund new data centers, marking the largest such transaction for AI infrastructure to date.
These funds are specifically earmarked for financing data centers in Texas and Wisconsin. These facilities are part of Oracle’s larger initiative, known as Stargate, which involves a colossal $500 billion investment in AI infrastructure alongside OpenAI.
What is Stargate?
Stargate is Oracle's ambitious project to build extensive AI infrastructure in collaboration with OpenAI. It represents a multi-billion dollar commitment to developing the advanced computing power needed for cutting-edge artificial intelligence.
Impact on Corporate Bond Market
When major corporate bond issuers rapidly increase their debt balances, it can create interesting dynamics in the secondary market. Oracle currently has about $95 billion of debt outstanding. This makes it the largest corporate issuer outside the financial sector within the Bloomberg high-grade index.
Nicholas Elfner, co-head of research at Breckinridge Capital Advisors, explained the market implications. He stated that index trackers might add to the name to maintain their weighting. Conversely, those with a negative credit outlook might acquire CDS protection to hedge their holdings or bet on a widening of spreads.
Just last month, Oracle secured $18 billion in the corporate-bond market. This was the second-largest high-grade market deal of the year, underscoring the company's substantial borrowing activities.
- $95 billion: Oracle's approximate outstanding debt.
- $18 billion: Amount borrowed in the corporate-bond market last month.
- Largest corporate issuer: Outside the financial sector in the Bloomberg high-grade index.
Optimism surrounding artificial intelligence has been a significant driver for US stocks, pushing them to new record highs. However, some market observers maintain skepticism about the long-term sustainability of such a rally, particularly as companies like Oracle take on substantial debt to fuel their AI ambitions.
The Future of Oracle's AI Investments
Oracle's commitment to AI is clear, with the Stargate project representing a monumental investment. The company is positioning itself at the forefront of AI infrastructure development, a move that requires substantial capital.
While these investments promise future growth in the rapidly expanding AI sector, they also introduce financial risks that credit markets are now actively pricing in. The balance between aggressive expansion and prudent financial management will be crucial for Oracle in the coming years.
The market will closely watch how Oracle manages its increasing debt load. The success of its AI initiatives will be key to justifying these large-scale investments and reassuring investors about the company's long-term financial health.