A Hedge Against AI Crash Emerges as Oracle CDS Market Explodes
Oracle Corp., the once-hungry database giant that borrowed tens of billions of dollars and staked its fortune on the AI boom, is quickly emerging as the credit market’s barometer of AI risk.
Oracle’s massive AI-related spending spree, its central role in a web of interconnected deals and Microsoft Corp. or Alphabet Inc. Traders have flocked to the company’s credit default swaps in recent months, as weaker credit scores compared to players like the likes have made the contracts the market’s preferred way to hedge and bet against the AI boom.
The cost of protecting against a company defaulting on debt over five years has tripled in recent months to 1.11 percentage points a year, or about $111,000 for every $10 million of principal protected, according to ICE Data Services.
As AI skeptics flocked in, trading volume on the company’s CDS rose to nearly $5 billion in the seven weeks ended Nov. 14, according to Barclays Plc credit strategist Jigar Patel. This was up from just over $200 million during the same period last year.
“As we often see in markets, liquidity begets liquidity, and once the flywheel starts, it tends to continue,” said Matt Schrager, co-head of TD Securities Automated Trading.
Oracle shares also reflect growing investor concern; It lost nearly a third of its value from Sept. 10 to Wednesday’s close. A representative for Oracle declined to comment.
To be clear, few are suggesting that the company, which has a triple investment grade rating and a market cap of roughly $620 billion, will be unable to meet its obligations any time soon. On the contrary, if investors’ confidence in artificial intelligence wanes, Oracle’s default swaps will rise even further, generating a tidy profit for those who buy the derivatives and offsetting losses incurred in broader sell-offs.
Artificial intelligence-related stocks erased early gains on Thursday, sparking a broader market selloff amid renewed concerns that corporate revenues and profits won’t be able to keep up with massive technology-related spending. Oracle shares fell as much as 5% while its bonds remained largely flat. The price of credit default swaps decreased to approximately 1.09 percent.
Oracle is among the companies that spend the most on artificial intelligence. Alongside OpenAI and SoftBank Group Corp., it is a major player in 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.
The company separately sold $18 billion of high-grade bonds in September; this was one of the largest US corporate bond offerings of the year.
Morgan Stanley analysts wrote last month that they expect Oracle’s net adjusted debt to more than double from about $100 billion to about $290 billion in fiscal 2028 and recommend investors buy the company’s five-year CDS and five-year bonds.
JPMorgan Chase & Co. Companies could sell nearly $1.5 trillion in high-quality bonds for AI-related investments in the coming years, according to strategists. Other markets, including junk bonds and leveraged loans, will also be flooded with AI-related debt, the bank said.
Citadel Securities estimates that so-called hyperscalers will sell about $100 billion of high-grade bonds on a net basis this year, and sees that figure as the minimum for next year.
“AI is the ‘Manhattan Project’ of hyperscalers,” credit analysts at Citadel Securities, including Jeff Eason, wrote in a recent note, noting that World War II was a decisive factor in the Allies winning the war. He referred to the development of the atomic bomb in World War II. “CEOs view the risk of not winning as just as much of a risk, if not more so, than overspending.”
With help from James Crombie and Phil Kuntz.
This article was generated from an automated news agency feed without modifications to the text.
