A gauge of risk on Oracle Corp.\u2019s debt reached a three-year high in November, and things are only going to get worse in 2026 unless the database giant is able to assuage investor anxiety about a massive artificial intelligence spending spree, according to Morgan Stanley.<\/p>\n
A funding gap, swelling balance sheet and obsolescence risk are just some of the hazards Oracle is facing, according to Lindsay Tyler and David Hamburger, credit analysts at the brokerage. The cost of insuring Oracle Corp.\u2019s debt against default over the next five years rose to 1.25 percentage points a year Tuesday, according to ICE Data Services. <\/p>\n
The price on the five-year credit default swaps is at risk of toppling a record set in 2008 as concerns over the company\u2019s borrowing binge to finance its AI ambitions continue to spur heavy hedging by banks and investors, they warned in a note Wednesday.<\/p>\n
The credit default swaps could break through 1.5 percentage points in the near term and could approach 2 percentage points if communication around its financing strategy remains limited as the new year progresses, the analysts wrote. In 2008, Oracle\u2019s credit default swaps hit a record 1.98 percentage points, ICE Data Services shows.<\/p>\n
A representative for Oracle declined to comment. <\/p>\n
Oracle is among firms taking part in an AI spending race, which has quickly made the data center giant the credit market\u2019s barometer for AI risk. The company borrowed $18 billion in the U.S. high-grade market in September. Early this month, a group of about 20 banks arranged a roughly $18-billion project finance loan to construct a data center campus in New Mexico, which Oracle will take over as its tenant.<\/p>\n
Banks are also providing a separate $38-billion loan package to help finance the construction of data centers in Texas and Wisconsin developed by Vantage Data Centers, Bloomberg reported last month. Lenders involved in these construction loans linked to Oracle probably are a key driver of the surge in trading volume on the Oracle\u2019s credit default swaps recently, a trend that may persist, according to Morgan Stanley.<\/p>\n
\u201cOver the past two months, it has become more apparent that reported construction loans in the works, for sites where Oracle is the future tenant, may be an even greater driver of hedging of late and going forward,\u201d the analysts wrote.<\/p>\n
There is a risk that some hedges by banks could unwind if and when banks distribute these loans to other parties, they wrote. Still, other parties may also hedge at some point even if down the road the construction debt funding needs don\u2019t stop after the Vantage sites and the New Mexico site.<\/p>\n
Last month, the analysts said they expect near-term credit deterioration and uncertainty to drive further hedging by bondholders and lenders. <\/p>\n
\u201cThe bondholder hedging dynamic and also the thematic hedging dynamic could both grow in importance down the road,\u201d they added.<\/p>\n
Oracle credit default swaps have underperformed the broader investment-grade CDX index and Oracle corporate bonds have underperformed the Bloomberg high-grade index amid the jump in hedging demand and the weakening sentiment. Concerns have also started to weigh on Oracle\u2019s stock, which the analysts said may incentivize management to outline a financing plan on the upcoming earnings call, including details on Stargate, data centers and capital spending.<\/p>\n
The analysts had previously been recommending that investors buy Oracle bonds and credit default swaps in what is known as a basis trade, to profit from their expectation that credit derivatives would widen more than the bonds. Now they\u2019re saying it\u2019s a cleaner trade to just buy the credit default swaps outright.<\/p>\n
\u201cTherefore, we are closing the \u2018buy bond\u2019 part of the basis trade, and keeping the \u2018buy CDS protection\u2019 leg of it,\u201d they wrote. \u201cWe think a trade in CDS outright is cleaner right now and will result in a greater spread move.\u201d<\/p>\n