Oracle Becomes Credit Market's AI Risk Barometer
Oracle Corporation, the established database leader that has transformed itself by embracing artificial intelligence, is now serving as the financial market's primary indicator for AI-related credit risk. The company's aggressive borrowing and massive AI investments have positioned it at the center of a growing debate about the sustainability of the AI boom.
Credit-Default Swaps Triple Amid AI Spending Spree
The cost to protect against Oracle defaulting on its debt has dramatically increased in recent months. The price for five-year credit-default swaps tripled to reach 1.11 percentage points annually by Wednesday, translating to approximately $111,000 annually to insure every $10 million of debt principal, according to ICE Data Services.
Trading activity in Oracle's credit derivatives has exploded, with volume reaching about $5 billion over the seven weeks ending November 14, as reported by Barclays Plc credit strategist Jigar Patel. This represents a staggering increase from just over $200 million during the same period last year.
Matt Schrager, co-head of TD Securities Automated Trading, explained the phenomenon: "As we often see in markets, liquidity begets liquidity, and once that flywheel starts it tends to keep going."
Massive AI Investments Drive Market Concerns
Oracle stands among the most aggressive spenders in artificial intelligence infrastructure. The company plays a crucial role in Stargate, a $500 billion AI infrastructure project that also involves OpenAI and SoftBank Group Corp. As part of this ambitious initiative, approximately 20 banks are providing an $18 billion project finance loan to construct a data center campus in New Mexico, which Oracle will eventually operate as tenant.
The company's substantial AI expenditures come alongside other significant financial moves. In September, Oracle sold $18 billion of high-grade bonds, marking one of the largest corporate bond offerings in the United States this year.
Morgan Stanley analysts project that Oracle's net adjusted debt will more than double from around $100 billion to roughly $290 billion by fiscal year 2028. In response to these projections, they've recommended investors consider both the company's five-year credit-default swaps and five-year bonds.
Broader Market Implications for AI Financing
The AI investment wave extends far beyond Oracle. JPMorgan Chase & Co. strategists estimate that companies could issue approximately $1.5 trillion of high-grade bonds specifically for AI-related investments in the coming years. Other debt markets, including junk bonds and leveraged loans, are also expected to see substantial AI-linked borrowing.
Citadel Securities estimates that so-called hyperscalers will sell about $100 billion of high-grade bonds on a net basis this year, with that figure representing a minimum expectation for next year. In a recent analysis, Citadel Securities credit analysts including Jeff Eason drew a dramatic comparison, describing AI as the hyperscalers' "Manhattan Project," referencing the World War II atomic bomb development that proved decisive for Allied victory.
The analysts noted that corporate leaders view the risk of not winning the AI race as potentially more dangerous than the risk of overspending, driving the massive investment surge.
While Oracle maintains investment-grade ratings from all three major agencies and commands a market capitalization of approximately $620 billion, few analysts suggest the company faces imminent default risk. Instead, investors are using Oracle's credit derivatives as a hedge against potential broader disappointment in AI returns.
The thinking among market participants is that if investor confidence in AI falters, Oracle's default swaps could surge even higher, generating profits for those who purchased the derivatives and offsetting losses from broader market declines.
Oracle's stock performance reflects these growing concerns, with shares losing about one-third of their value from September 10 through Wednesday's close. On Thursday, AI-related stocks erased early gains amid renewed concerns that corporate revenues and profits might not justify the massive technology spending, with Oracle shares falling as much as 5% during the session.
