Oracle. [Getty Images]
Oracle. [Getty Images]

Oracle's credit-risk gauge has soared to its highest level in 18 years, as market skepticism grows over whether the company's massive AI infrastructure spending will translate into real profits.

Oracle's five-year credit default swap spread rose to 203 basis points (1 bp = 0.01 percentage point) Monday morning, according to Bloomberg, citing ICE Data Services.

That is the highest level since data collection began in late 2008. Insuring against default on $10 million of Oracle bonds now costs roughly $203,000 a year.

A CDS is a derivative instrument that compensates bondholders for losses if the issuing company defaults or fails to meet its debt obligations. The higher the perceived default risk, the more expensive the CDS.

The risk premium on Oracle's corporate bonds also widened. According to TRACE data, the spread on Oracle's actively traded bonds maturing in 2056 rose 8 bp to 263 bp over US government bonds Monday.

Markets are watching closely whether Oracle can convert the vast sums it has poured into AI data centers and cloud infrastructure into actual sales and profit.

Concerns about AI spending weighing on profitability have resurfaced, particularly as major US big-tech companies begin reporting earnings Wednesday, starting with Alphabet.

S&P earlier this month cut Oracle's credit rating by one notch, citing rising capital expenditure on AI infrastructure and the resulting financial burden. The adjusted rating sits at the lower end of investment grade, leaving Oracle just one step above junk status.

However, analysts say an immediate downgrade to junk is unlikely.

In a July 9 report, Morgan Stanley credit analyst Lindsey Tyler said the risk of an immediate fall from investment grade to junk is limited "because equity-financing options and early-repayment mechanisms exist," but added that the medium-term outlook "depends on business execution and whether AI investment can be monetized."

Ultimately, the key variable determining Oracle's creditworthiness will not be the scale of its AI infrastructure expansion, but how quickly the company converts that investment into cash flow and earnings.


sjy@heraldcorp.com