Oracle is one notch above junk after the S&P downgrade as AI data usage heats up money.
The TL;DR
S&P cut Oracle to one notch above junk as its AI data center bet burned cash and the value of bond investors at risk.
S&P downgraded Oracle to BBB- on July 9, putting the company one notch above junk status, as a $250 billion data center expansion plan burns through cash faster than revenue can replace it. Oracle is now the second largest issuer of non-financial debt in the Bloomberg US Corporate Bond Index behind Amazon, at $117 billion. Shares fell nearly 6 percent on Thursday as bond investors began pricing Oracle’s debt closer to speculative grade.
Oracle’s free cash flow took a turn for the worse in its fiscal year ended May 31, with the company burning nearly $24 billion after major expenses. I&P estimates the deficit could expand to $42 billion as Oracle continues to build data centers at an unprecedented pace. Moody’s also put a negative outlook on the company, indicating that the second rating agency sees material risks to Oracle’s trajectory.
The bond market is already pretending the decline will continue. Oracle’s ten-year bonds yield about six and a half percent, above the BBB index average and close to the BB range that marks junk territory, according to Bloomberg. George Catrambone, head of fixed income at DWS Americas, told Bloomberg that the gap reflects investors seeking a premium over uncertainty about whether AI revenues will justify debt.
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Betting is very focused. I&P estimates that about half of Oracle’s $638 billion in outstanding performance obligations, its measure of future contract revenue, is tied to OpenAI. Oracle spent more than $55 billion on data centers in its last fiscal year and expects to raise another $40 billion in debt and equity this year, including $20 billion in stock sales at market prices.
Oracle is not alone in shouldering the burden of AI infrastructure. Hyperscalers collectively plan to spend up to $725 billion on AI this year, and Big Tech’s combined AI debt has already reached $350 billion, according to Bloomberg. But Oracle doesn’t have the cash flow cushion that protects its peers: Google posted nearly $73 billion in free cash flow last year, while Oracle’s cash generation has collapsed under the weight of big spending.
Oracle has asked customers to prepay for computer parts to help ease the financial burden, and says that prepaid and customer-supplied hardware for major AI contracts now totals $75 billion. Whether that’s enough to prevent further cuts depends on how cloud revenue, which grew 93 percent last quarter, can catch up to its borrowing. The company is betting everything AI wants at levels that allow it to turn one of the most used balance sheets in tech into something more profitable.
