Oracle's Credit Risk Nears 18-Year High Amid AI Spending and Chinese Competition

Chinese startup Moonshot AI’s Kim-3 open-source AI model is adding to the concerns over the billions that US tech companies are spending on artificial intelligence. So much so that OpenAI’s Head of Strategic Futures Dean W. Ball recently said that the US government should sspread "FUD" (Fear, Uncertainty and Doubt) by issuing regulatory warnings to scare private companies away from using Chinese models. Oracle, one of the biggest investor in AI infrastructure, is now facing growing pressure after global ratings agency S&P downgraded its credit rating earlier this month. The company has also seen its perceived credit risk climb to its highest level in nearly 18 years, as investors worry about its rising debt and heavy AI spending amid increasing competition from low-cost Chinese AI models. Downgrading Oracle’s rating one notch above junk last month, S&P said: “... we lowered our long-term issuer credit rating (ICR) on Oracle to 'BBB-' from 'BBB',” S&P said adding “we lowered the short-term ICR and commercial paper rating to 'A-3' from 'A-2', ”.

Oracle’s credit risk nears 18-year high

Meanwhile, Oracle’s credit risk is nearly 18 months high. According to a Bloomberg report, the company’s bonds weakened across the curve on Monday, July 20. The spread on Oracle’s 6.7% bonds maturing in 2056, one of its most actively traded bonds, widened by about 8 basis points to 263 basis points, according to Trace data. Its 5.7% notes due in 2036 also widened by around 9 basis points to 205 basis points.

Sam Altman’s OpenAI remains a key credit risk for Oracle

In its July 9 note, S&P said that OpenAI is estimated to make up roughly half of the $638 billion in oracle’s remaining performance obligation (RPO). “OpenAI’s ability to meet its contractual obligations and raise external financing will be contingent upon AI tailwinds continuing and its models being market leaders,” it stated. If OpenAI were unable to pay Oracle, the agency stated “Oracle could be left with massive data center leases that it might be unable to exit or have to re-lease to new tenants under less-favorable terms”. "ORCL very well may turn out to be the first of the mega-cap-tech 'Hyperscalers' to be rolling over into what could (and is increasingly likely to) prove to be the early stages of a longer-term, cyclical bear market for equities," Richey wrote in a July 13 client note. “Oracle’s AI business requires significant upfront capital investments and long-term data center leases, both of which we have continually underestimated. Rising component costs could also pressure the economics of the AI business model,” the agency added. “The industry’s rapid capacity expansion is a growing risk. Near-term demand is strong, but this could reverse if leading frontier model developers are unable to raise external financing or stop subsidizing their customers”.