Oracle credit risk rises as AI debt pressures investment-grade rating

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Oracle credit risk rises

Highlights

Oracle's five-year credit default swap spreads reached 295 basis points, up 287% year-on-year, signaling BB/B-like risk despite its BBB- rating.
Oracle's $118 billion in long-term debt and negative free cash flow forecasts for 2024 (-$23.7 billion) and 2027 (-$36 billion) heighten downgrade risk tied to AI expansion.
A junk downgrade could trigger forced selling of Oracle debt by investment-grade-only investors, increase financing costs, and impact broader AI-related credit markets.

Credit stress builds around Oracle's AI expansion

As reported by CNBC, Oracle's five-year credit default swaps, a form of insurance against default, are trading at levels more commonly associated with BB and B rated borrowers, even though the company remains investment grade. Gavan Nolan, executive director of fixed income pricing at S&P Global Market Intelligence, said the spread is 295 basis points after briefly touching 300 basis points on Thursday, up 287% over one year.

The repricing follows a wider pullback in AI-linked assets, led in part by weakness at CoreWeave, whose equity and debt have been falling. Pat Nerney, head of investment solutions at Dynasty Financial Partners, said market sentiment is shifting rapidly in 2026, swinging from strong optimism to sharp pessimism.

Oracle is rated BBB- by S&P, the lowest rung of investment grade, after a downgrade in July tied to rising credit risk from its fast-growing infrastructure business. S&P also said at the time that it expects weaker operating cash flow in 2027 and warned that another downgrade could come if leverage stays above 4 times, if free operating cash flow is not on track to turn positive by fiscal 2029, or if its view of Oracle's AI strategy worsens.

Oracle, long known for enterprise software, is expanding aggressively into data centers and cloud services, including a $300 billion deal with OpenAI. FactSet data cited in the report show the company has issued $118 billion in long-term debt and carries another $39 billion in capital and lease obligations, while consensus forecasts point to free cash flow of negative $23.7 billion this year and negative $36 billion in 2027.

Downgrade risk could ripple through AI financing

Investors and analysts cited in the report say Oracle is still distinct from CoreWeave because it remains investment grade, and some do not see immediate danger. Brad Collins, a fixed income portfolio manager at Vanguard, said Oracle is under close scrutiny but has been more disciplined in its debt issuance this year, adding that he would not extend current high-yield market stress to investment-grade borrowers.

Jamie Meyers, a senior securities analyst at Laffer Tengler, which owns Oracle stock, said a move into junk territory would materially change Oracle's borrowing profile. He said lower-rated issuers are unlikely to place 30-year debt, meaning Oracle could be pushed toward shorter maturities and higher financing costs if it loses its investment-grade standing.

That matters beyond Oracle alone because the company has become an AI bellwether for credit markets. Jim Reid, global head of macro and thematic research at Deutsche Bank, said a junk downgrade could force sales by investors restricted to investment-grade debt, while Nerney described the current period as a financing test that will show whether Oracle can absorb higher rates as it waits for AI revenue to scale.

Oracle said maintaining an investment-grade rating is its first priority as a company. It added that its AI infrastructure business has strong economic returns and should generate strong free cash flow once projects are fully ramped.

In our earlier article on the financial strains hitting U.S. AI data center expansion, we explained that higher funding costs, construction delays, and power constraints are making it harder for developers to deliver on ambitious buildout plans. We also highlighted how weakening investor sentiment—seen in moves like the CoreWeave sell-off and cost overruns at projects such as Cipher—has increased scrutiny over whether the sector can turn massive capital spending into sustainable returns.

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