Oracle’s credit default swaps are plummeting after financing plans

Oracle’s 5-year credit default swaps fell 17% after the software vendor’s plan to raise $50 billion in debt and equity increased investors’ confidence that the company could avoid a credit rating downgrade while financing its AI development.

“Equity financing significantly inhibits credit downside,” Barclays credit analyst Andrew Keches said in a note to clients Monday. Keches upgraded Oracle’s debt to overweight and said the CDS needed to be tightened further.

Credit default swaps are like insurance for investors; Buyers pay for protection in case the borrower defaults on the loan.

Oracle’s CDSs rose late last year on concerns that the company’s large data center commitments would hurt its balance sheet, putting debt investors at risk. Oracle raised $18 billion in a jumbo bond sale in September, one of the largest debt issuances in the tech industry.

The 5-year swaps are seen by the market as a way for investors to hedge their bets on the AI ​​boom. Keches wrote that Oracle has been caught in a “peak fear” cycle for the past few months, with the market reacting negatively to almost every headline.

Oracle said Sunday it plans to raise debt and equity capital from $45 billion to $50 billion this year to create additional capacity to meet contracted demands from cloud customers including Nvidia, Meta, OpenAI and Elon Musk’s xAI. Using equity as leverage signals to bond investors that the company is not solely dependent on debt.

Oracle’s shares have fallen by more than half since peaking in September amid fears tied to the company’s financing plans and dependence on OpenAI. At least $300 billion of Oracle’s remaining $523 billion in performance obligations is tied to OpenAI, according to analysts at DA Davidson.

Following the company’s quarterly earnings report in December, Oracle executives refrained from detailing a comprehensive financing plan, hurting the stock and raising CDS prices.

While the latest financing announcement builds confidence among debt investors, the stock fell another 3% on Monday as the equity issuance is expected to dilute existing shareholders, at least in the near term. Oracle is using an at-the-money bid that will likely require selling about 10% of its total trading volume over the next few weeks, traders told CNBC.

UBS analysts warned in a note that the $20 billion to $25 billion raise from share sales “may not be warmly welcomed by all shareholders.”