AI Debt Fear Storm Centers on Oracle
Oracle has found itself at the epicenter of concerns regarding the financial implications of the artificial intelligence boom. On Tuesday in New York, a key credit-risk gauge associated with Oracle's debt reached its highest point since the global financial crisis.
The cost for investors to protect against Oracle defaulting on its debt climbed to approximately 1.28 percentage points per year. This figure, derived from end-of-day credit derivative pricing provided by ICE Data Services, represents the highest level recorded since March 2009.
This significant reading saw an increase of nearly 0.03 percentage points in a single day and has more than tripled from its level of 0.36 percentage point in June.
The sharp rise follows a substantial period of bond sales across the technology sector. Oracle has become particularly noteworthy due to the sheer volume of its debt issuance and its comparatively weaker credit rating when contrasted with other major cloud providers.
In recent months, the company has issued tens of billions of dollars in bonds through its own offerings and by supporting large-scale projects.
This confluence of factors has positioned Oracle's credit default swaps as a critical hedging instrument for investors anticipating a potential downturn in the AI market.
Debt Sales Surge and CDS Trading Explodes
The escalating cost of default protection reflects growing apprehension about the significant disparity between the substantial capital invested in AI and the timeline for realizing tangible improvements in productivity and profits.
Hans Mikkelsen, a strategist at TD Securities, commented that the current surge bears resemblance to past market manias. "We’ve had these kinds of cycles before," he stated in an interview. "I can’t prove that it’s the same, but it seems like what we’ve seen, for example, during the dot-com bubble."
In late November, Morgan Stanley issued a warning, suggesting that Oracle's increasing debt burden could drive its credit default swaps towards 2 percentage points, a level just above the company's record high from 2008.
Tuesday's closing price marked the highest point for the gauge since March 2009, when it reached 1.30 percentage point.
Oracle maintains the lowest credit rating among the major hyperscalers. In September, the company successfully sold $18 billion in U.S. high-grade corporate bonds. Furthermore, its data center expansion is linked to the largest AI-infrastructure deal to date to enter the market.
The company's strategic focus on AI is closely intertwined with OpenAI, and Oracle anticipates generating hundreds of billions of dollars in revenue from its partnership with OpenAI over the coming years.
As of the end of August, Oracle held approximately $105 billion in total debt, including lease obligations, according to data compiled by Bloomberg.
Roughly $95 billion of this total is comprised of U.S. bonds included in the Bloomberg U.S. Corporate Index, making Oracle the largest issuer in that index outside of the banking sector.
Investor demand for protection has seen a rapid increase. Trading volume in Oracle's credit default swaps surged to approximately $5 billion in the seven weeks concluding on November 14. This data comes from an analysis of trade-repository information conducted by Barclays credit strategist Jigar Patel.
For comparison, this volume was just over $200 million during the same period in the previous year.
Bond Supply Expands as AI Spending Accelerates
The ongoing buildout of artificial intelligence infrastructure shows no signs of slowing down. Investments aimed at expanding AI infrastructure and power capacity are projected to continue significantly into the next year.
TD Securities' Mikkelsen forecasts that U.S. investment-grade corporate bond sales could reach a record $2.1 trillion in 2026. Issuance for the current year has already surpassed $1.57 trillion, based on data from Bloomberg News.
An additional wave of debt issuance could further strain market demand. If buyers become overwhelmed, issuers might need to offer higher yields to successfully place their bonds. Mikkelsen anticipates that credit spreads will stabilize within a base range of 100 to 110 basis points above benchmarks in 2026, a slight increase from the 75 to 85 basis points expected for 2025.
Significant borrowing is not an unprecedented phenomenon. Other sectors have experienced substantial debt cycles in the past. The healthcare industry, for instance, increased its leverage considerably over several years in the previous decade as it pursued growth, yet managed to maintain tighter spreads than the broader index, according to insights from Citigroup credit strategists Daniel Sorid and Mathew Jacob in a note dated November 24.
Despite historical parallels, these strategists highlighted the specific risks faced by bond investors connected to the AI sector. Corporate bondholders may have limited upside potential if the AI boom continues its rapid expansion.
If companies persist in channeling substantial funds into artificial intelligence development and deployment, the credit quality of existing debt holdings could be negatively impacted.
"Investors are becoming increasingly concerned about how much more supply may be on the horizon," the Citigroup team wrote. "The impact of this hesitation on spreads for the sector has been quite notable."