Insuring Against an Oracle Default Is Getting Costlier. Is It a Bad Omen for AI?

Oracle is taking on tens of billions of dollars in debt to finance its cloud infrastructure. (Courtesy Oracle)

Key Points

• Oracle’s five-year credit default swap prices reached a two-year high, nearly doubling since mid-June.
• Oracle’s long-term debt exceeded $90 billion in August, with an additional $18 billion in bonds issued in September.
• S&P and Moody’s issued negative credit rating outlooks for Oracle last month due to rapid business scaling risks.

As Oracle pours money into artificial intelligence, investors are finding it more and more expensive to insure against a potential AI meltdown.

The price of Oracle’s five-year credit default swaps hit their highest point in more than two years earlier this month and now sit just below that peak. Spreads have nearly doubled since their six-month low in mid-June.

A credit default swap acts as insurance for corporate debt, with the buyer receiving a payout if the company can’t repay its bonds. Higher prices—or spreads—typically mean the market is pricing in a greater default risk.

In Oracle’s case, swap prices started to spike in mid-September, a week after the company issued a blockbuster cloud infrastructure revenue forecast and reported a $455 billion backlog for contracted work.

Financing the infrastructure to meet that demand will require taking on plenty of debt. The company had more than $90 billion in long-term debt as of August and issued $18 billion in bonds in September. Last month, S&P and Moody’s issued negative credit rating outlooks for Oracle.

“Scaling a business this rapidly carries risks,” wrote S&P analysts Andrew Chang and David T. Tsui.

None of that means Oracle will default on its debts. But if the credit default swap prices are any indicator, a growing cohort of investors are demanding a hedge against that possibility. Whether that’s a bad omen for AI or an understandable response to Oracle’s debt load likely depends on your prior convictions about AI.

Bears will say the widening swap spreads mean cracks are showing in the AI trade, said Mizuho trader Daniel J. O’Regan in a note Tuesday.

Bulls, meanwhile, will point out that the float of credit default swaps pales in comparison to Oracle’s market capitalization. Plus, the swaps are “just insurance given the massive debt issuance it has,” as O’Regan put it.

Shares of Oracle, like many big players in the AI race, have surged this year, climbing nearly 70%. The stock was up 0.4% on Tuesday, while the Nasdaq rose 0.3%.

Write to Nate Wolf at nate.wolf@barrons.com