Oracle Credit Derivatives Jump as Traders Rush to Hedge AI Bets
(Bloomberg) — The cost of protecting Oracle Corp.’s debt against default is rising by the most since 2021 as nervous investors and lenders rush to hedge against the billions of dollars the software giant is pouring into artificial intelligence.
Oracle, known for its eponymous database software, saw the spread on its five-year credit default swaps widen 13.5 basis points to 101.68 basis points on Friday. This is the largest jump since December 2021, according to ICE Data Services.
Credit default swap prices generally rise as investor confidence in the company’s credit quality declines. Hedging related to tens of billions of dollars of AI debt financing is also behind the rise, according to Bloomberg Intelligence’s Rob Schiffman, along with concerns that Oracle’s increasing leverage could push its credit ratings over the edge.
“Concerns are justified as short-term expenses have increased but related revenues have not been realized for several years,” Schiffman said in an emailed comment.
Oracle, OpenAI and SoftBank Group Corp. He is leading Stargate, a project that will quickly invest $500 billion to build artificial intelligence infrastructure. As part of that effort, a club of about 20 banks is providing a nearly $18 billion project finance loan to build a data center campus in New Mexico, where Oracle will take over as a tenant. Separately, Oracle sold $18 billion of high-grade U.S. bonds in September as it ramped up spending to meet the needs of the AI boom.
Morgan Stanley analysts wrote last month that Oracle’s bondholders and lenders are likely to continue to hedge in the near term. They project the firm’s net adjusted debt to more than double from about $100 billion to roughly $290 billion by fiscal 2028.
Schiffman and BI’s Alex Reid wrote in a note Friday that questions about future revenue and cash flow generation are weighing heavily on stock and bond prices as spending on AI infrastructure increases.
Although investors have become more cautious, sentiment has not completely changed. “While we see risk rising and tech debt underperforming further, concerns about a bubble appear overblown for now,” the analysts wrote.
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