A downgrade to junk could force investment-grade-only funds to sell Oracle debt
The cost of insuring Oracle’s debt against default has climbed to levels typically associated with high-yield credit, even though the software and cloud company still holds an investment-grade rating. The move puts a spotlight on how far stress in artificial intelligence financing could spread, and on credit exposure that advisors may hold on behalf of clients.
The spread on Oracle’s five-year credit default swaps (CDS), a contract that pays out if a borrower fails to repay, stood at 295 basis points on Monday morning after briefly touching 300 on Thursday, CNBC reported. That is up 287% in a year. Gavan Nolan of S&P Global Market Intelligence said the range is more in line with BB and B credit, which are high yield. He said the contracts are liquid, but that recent swings reflect fragile sentiment toward AI-related names at the weaker end of investment grade.
A later CNBC report put the spread at 315 basis points on Monday, up 311% from a year earlier.
How close Oracle sits to junk
S&P Global Ratings cut Oracle to BBB- from BBB on July 9, the lowest investment-grade rung. The outlook is stable. S&P forecast a fiscal 2027 free operating cash flow deficit of nearly $42 billion, up from its earlier forecast of about $24 billion, and adjusted leverage in the mid-4x range.
The agency said it could cut the rating again if it expects leverage to stay above 4.5x, if Oracle does not look on track for positive free operating cash flow by fiscal 2029, or if it takes a negative view of Oracle’s AI strategy or the broader industry. CNBC cited a 4x leverage trigger.
Moody’s Ratings affirmed its Baa2 rating on Oracle in September while keeping a negative outlook. That sits one notch above the bottom of Moody’s investment-grade scale.
The pressure comes from the size of the buildout. Oracle is working on a $300 billion deal with OpenAI, and CNBC cited FactSet data showing the company has issued $118 billion in long-term debt and carries another $39 billion in capital and lease obligations. Analysts expect free cash flow of negative $36 billion in 2027, according to consensus forecasts cited by CNBC. A second CNBC report put Oracle’s net debt at about $132 billion.
Deutsche Bank’s Jim Reid called Oracle an AI bellwether and warned that a junk rating could pressure investment-grade-only investors into forced selling, CNBC reported. Mandates that limit holdings to investment-grade debt would have to sell if a downgrade crossed the line.
Oracle shares rose about 1.1% to $129.59 on Monday after falling 4.6% to $128.23 on Friday, according to CNBC and FX Leaders.
A sentiment split
Oracle said maintaining an investment-grade rating is its first priority and that it expects the AI infrastructure business to produce strong free cash flows once projects are ramped, according to CNBC.
Some fixed income investors are less worried. Brad Collins, a fixed income portfolio manager at Vanguard, told CNBC that Oracle has been more diligent in its issuance and that he would not extrapolate stress in high yield to investment-grade credit. Jamie Meyers of Laffer Tengler, which owns Oracle stock, said the company needs time to build out capacity. Pat Nerney of Dynasty Financial Partners called the situation a financing test and said rising rates could add to the cost of holding Oracle debt.
Others see wider risk. Economist David Rosenberg said a downgrade to junk “would be the clearest sign of contagion,” according to a second CNBC report.
The weakest link so far is CoreWeave. S&P rates the AI cloud provider B+. Reuters reported its five-year CDS rose to around 1,000 basis points last week, with bond yields above 16%, as investors questioned its roughly $50 billion in debt. CNBC put the CDS at about 1,082 basis points on Monday.
