As market enthusiasm for artificial intelligence cools, Oracle's bonds are dangerously approaching junk territory. Last week, AI-related trading saw a significant retreat, with CoreWeave—the new cloud company—leading the decline, as both its equity and debt fell.
Oracle now faces the risk of a credit rating downgrade, which could push its debt into junk status and trigger ripple effects across the entire AI financing ecosystem.
“Market sentiment seems to have shifted, which almost mirrors the overall situation in 2026: we oscillate between being extremely bullish on everything and extremely bearish on everything,” said Pat Nerney, Head of Investment Solutions at Dynasty Financial Partners. “This highlights just how quickly this market is changing.”
However, there is a key difference between CoreWeave and Oracle—Oracle remains investment-grade, while CoreWeave has already fallen into junk status. Some analysts and fixed-income investors told CNBC they are currently not concerned about Oracle or other hyperscale cloud providers.
Nevertheless, the shift in market sentiment can be seen in the spread of Oracle’s five-year credit default swap (CDS). CDS is a form of default insurance. Gavan Nolan, Executive Director of Fixed Income Pricing at S&P Global Market Intelligence, said this spread level is closer to that of BB and B-rated credits, which are considered high-yield bonds.
The five-year CDS spread for Oracle is currently at 295 basis points, having touched 300 basis points on Thursday, a 287% increase compared to a year ago.
Oracle CDS is supported by high liquidity. Nevertheless, its spread has fluctuated significantly over the past few days, clearly reflecting fragile sentiment toward AI-related names, particularly on the weaker end of high-yield and investment-grade bonds, such as Oracle,” he said in an email to CNBC.
A credit default swap is a contract in which the buyer pays a fee to protect against a borrower's failure to repay debt. A widening CDS spread indicates that investors perceive higher risk in the debt.
Oracle has a BBB- credit rating from S&P, the lowest investment-grade tier. The agency downgraded Oracle's rating in July, noting that the company's rapidly expanding infrastructure business is increasing its overall credit risk. S&P also expects operating cash flow to be weaker by 2027.
Barometer
Oracle is primarily an enterprise software company, but it is aggressively expanding into data centers and cloud services, including a massive deal worth up to $300 billion with OpenAI. To fund this expansion, Oracle has issued $118 billion in long-term debt and taken on an additional $39 billion in capital and lease obligations, according to FactSet data.
These expenses and debt obligations are straining Oracle’s financial position as the company awaits a large-scale release of AI revenue. According to consensus estimates, analysts project the company’s free cash flow to be negative $23.7 billion this year and negative $36 billion in 2027.
This is bad enough for investors, but Oracle is not just a data center stock burdened by debt. Jim Reid, Head of Global Macro and Thematic Research at Deutsche Bank, noted that it has become an AI “bellwether.” If its credit rating is downgraded to junk status, “it could force investors restricted to investment-grade bonds to sell passively,” he said in a report.
In July, S&P stated that it could downgrade the rating again if any of the following occurs: Oracle's leverage ratio is expected to remain above 4x; the software company is deemed unable to return to positive free cash flow from operations before fiscal year 2029; or there is a negative outlook on Oracle’s AI strategy or the broader AI industry’s prospects.
Laffer Tengler holds Oracle stock, and Jamie Meyers, its senior securities analyst, stated that as an investment-grade company, Oracle can borrow at lower costs and over longer terms, but this would change if it were downgraded to junk status.
“In the high-yield bond market, no one buys 30-year bonds,” he said. “If downgraded to junk status, it means they’d be forced to shorten all their financing maturities. Clearly, their borrowing rates would likely rise as well.”
However, Meyers is not concerned about Oracle's debt levels. He said that when Oracle met with Laffer Tengler last year, Oracle emphasized its commitment to maintaining its investment-grade rating.
“We do believe that revenue will begin to accelerate and profits will also start to accelerate,” he said. “What Oracle really needs is... time. They need to build out these projects.”
Vanguard’s fixed-income portfolio manager, Brad Collins, also expressed confidence in Oracle and other hyperscale cloud providers.
“Oracle has received the most attention, but也因此 has become more cautious in its bond issuance this year to date,” he said. “Our balance sheet starts from a healthy position, and I wouldn’t extrapolate what we’re seeing in the high-yield bond market to the investment-grade market.”
Nerney of Dynasty Financial Partners said Oracle’s current difficulties can be viewed as a “financing test.” They will either pass or fail, which could lead to further downgrades.
“The real question now is, how much more will this cost as interest rates rise?” he said. “If interest rates continue to climb, the opportunity cost for investors holding Oracle bonds compared to other assets in the market will only increase, and the market will demand greater compensation.”
In response to a request for comment, Oracle stated: "We have always been very clear that maintaining an investment-grade rating is the company's top priority."
The AI infrastructure business has strong economic returns, and we expect it to generate robust free cash flow once the project enters its scaling phase, the company added.