Oracle Corp., the once stodgy database giant that\u2019s borrowed tens of billions and tethered its fortunes to the artificial intelligence boom, is quickly emerging as the credit market\u2019s barometer for AI risk.<\/p>\n
Traders have piled into the company\u2019s credit-default swaps in recent months as Oracle\u2019s massive AI-related spending spree, its central role in a web of interrelated deals, and its weaker credit grades compared with players such as Microsoft Corp. or Alphabet Inc. have made the contracts the market\u2019s preferred way to hedge \u2014 and bet against \u2014 the AI boom.\u00a0<\/p>\n
The price to protect against the company defaulting on its debt for five years tripled in recent months to as high as 1.11 percentage point a year on Wednesday, or around $111,000 for every $10 million of principal protected, according to ICE Data Services.\u00a0<\/p>\n
As AI skeptics rushed in, trading volume on the company\u2019s CDS ballooned to about $5 billion over the seven weeks ended Nov. 14, according to Barclays Plc credit strategist Jigar Patel. That\u2019s up from a little more than $200 million in the same period last year.\u00a0<\/p>\n
\u201cAs we often see in markets, liquidity begets liquidity, and once that flywheel starts it tends to keep going,\u201d said Matt Schrager, the co-head of TD Securities Automated Trading.<\/p>\n
Oracle\u2019s shares also reflect investors\u2019 growing concern, losing about a third of their value from Sept. 10 through Wednesday\u2019s close. A representative for Oracle declined to comment.<\/p>\n
To be clear, few suggest that the company, with a trio of investment-grade ratings and a roughly $620 billion market capitalization, is going to default on its obligations anytime soon. Rather, the thinking is that should investors\u2019 confidence in AI falter, Oracle\u2019s default swaps will surge even higher, minting a tidy profit for those who scooped up the derivatives and counterbalancing any losses they suffer in the broader selloff.<\/p>\n
AI-related stocks erased early gains on Thursday, leading a broader market selloff amid renewed concerns that corporate revenues and profits may not keep pace with the massive spending tied to the technology. Oracle shares fell as much as 5%, while its bonds largely held steady. The price on its credit-default swaps edged lower to about 1.09 percentage point.<\/p>\n
Oracle is among the firms spending the most in artificial intelligence. Alongside OpenAI and SoftBank Group Corp., it is a key player in Stargate, a project to rapidly invest $500 billion to build AI infrastructure. As part of that effort, a club of about 20 banks is supplying a roughly $18 billion project finance loan to construct a data center campus in New Mexico, which Oracle will take over as tenant.<\/p>\n
The company separately sold $18 billion of high-grade bonds in September, one of the biggest US corporate bond offerings of the year.<\/p>\n
Morgan Stanley analysts wrote last month that they expect Oracle\u2019s net adjusted debt to more than double to roughly $290 billion by fiscal year 2028 from around $100 billion and they recommended that investors buy the company\u2019s five-year CDS and its five-year bonds.<\/p>\n
Companies could sell around $1.5 trillion of high-grade bonds for AI-related investments in the coming years, according to JPMorgan Chase & Co. strategists. Other markets, including junk bonds and leveraged loans, will also be flooded with debt linked to AI, the bank said.<\/p>\n
Citadel Securities estimates that so-called hyperscalers will sell about $100 billion of high-grade bonds this year on a net basis, and sees that figure as a minimum for next year.<\/p>\n
\u201cAI is the hyperscalers\u2019 \u2018Manhattan Project,\u2019\u201d wrote Citadel Securities credit analysts including Jeff Eason in a recent note, referring to the development of the atomic bomb in World War II that was a decisive factor in the Allies winning the war. \u201cCEOs see the risk of not winning as just as much, if not more of a risk, as overspending.\u201d\u00a0<\/p>\n
With assistance from James Crombie and Phil Kuntz.<\/p>\n
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