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The cost of protecting Oracle Corp.’s debt against default is surging by the most since 2021, as jittery investors and lenders rush to hedge against the billions of dollars the software giant is pouring into artificial intelligence.
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Oracle, known for its namesake database software, saw the spread on its five-year credit default swaps jump 13.5 basis points on Friday to 101.68 basis points. That’s the biggest bounce since December 2021, according to ICE Data Services.
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Credit default swap prices usually rise as investor confidence in the company’s credit quality falls. Worries that Oracle’s rising leverage may push its credit ratings over the junk-cliff, as well as hedging related to its tens of billions of dollars in AI debt financing, are likely behind the upswing, according to Bloomberg Intelligence’s Rob Schiffman.
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“With near-term expenses rising, yet related revenues not realized for a few years, concerns are justified,” Schiffman said in emailed commentary.
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A representative for Oracle declined to comment.
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Oracle, alongside OpenAI and SoftBank Group Corp., is spearheading Stargate — a project to rapidly invest US$500 billion to build AI infrastructure. As part of that effort, a club of about 20 banks is supplying a roughly US$18 billion project finance loan to construct a data centre campus in New Mexico, which Oracle will take over as tenant. Separately, Oracle sold US$18 billion of United States high-grade bonds in September, as it boosts spending to meet the needs of the AI boom.
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In the near-term, Oracle’s bondholders and lenders are likely to keep hedging, Morgan Stanley analysts wrote last month. They see the firm’s net adjusted debt more than doubling to roughly US$290 billion by fiscal year 2028, from around US$100 billion.
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As spending on AI infrastructure increases, questions regarding future revenue and cash-flow generation have broadly hit stock and bond prices, Schiffman and BI’s Alex Reid wrote in a Friday note.
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While investors are being more cautious, sentiment hasn’t totally shifted. “Though we see rising risk and further tech-debt underperformance, concerns about a bubble appear over hyped, for now,” the analysts wrote.
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