Oracle's credit default swaps have surged, reflecting fears that its debt could be downgraded to junk. This threatens to destabilise the broader AI financing market, as Oracle is a bellwether for the sector.
01Summary
- 01Oracle's five-year CDS spread reached 295 basis points, up 287% in a year, briefly hitting 300 bps on Thursday.
- 02S&P rates Oracle BBB-, the lowest investment-grade level, and downgraded it in July, citing rising credit risk from data centre spending.
- 03Oracle has $118 billion in long-term debt and $39 billion in capital and lease obligations, with free cash flow forecast at -$23.7 billion this year and -$36 billion in 2027.
- 04A downgrade to junk could force investment-grade-only investors into forced sales and raise Oracle's borrowing costs, says Deutsche Bank.
- 05Oracle insists its AI infrastructure will eventually produce strong free cash flows, and says maintaining investment grade is its top priority.
02Why it matters
If Oracle's debt slips to junk, it could trigger a sell-off by institutional investors and raise borrowing costs across the AI sector. This matters because Oracle's fate is seen as a test for the entire AI bull market.
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