Credit stress is threatening to unwind the AI bull. All eyes are on Oracle to hold the line

Oracle bonds are sitting dangerously close to junk territory as markets cool on artificial intelligence. Much of the AI trade fizzled last week, led by CoreWeave — the neocloud company whose equity and debt has been tanking.

Oracle now faces risk of credit rating downgrades that could tip its debt into junk territory — with potentially cascading effects across the AI financing ecosystem.

"There seems to be a sentiment shift, which almost speaks to 2026 in general, where we're so bullish about everything and then we're so bearish about everything," said Pat Nerney, head of investment solutions at Dynasty Financial Partners. "It just shows you how quickly this market moves."

But there are key differences between CoreWeave and Oracle — the latter is investment grade while Coreweave is already in junk territory. Some analysts and fixed income investors tell CNBC they aren't concerned yet about Oracle and the other hyperscalers.

Oracle is primarily an enterprise software company but it's barreling into data centers and cloud services, including a massive $300 billion deal with OpenAI. To fund the buildout, Oracle has issued $118 billion in long-term debt and has another $39 billion in capital and lease obligations, according to FactSet data.

The spending and debt obligations are taking a toll on Oracle's finances while the company waits for a gusher of AI revenue. Analysts estimate free cash flow of -$23.7 billion this year and -$36 billion in 2027, according to consensus forecasts.

That would be bad enough for investors, but Oracle is more than just a debt-laden data center play. It's become an AI "bellwether," notes Jim Reid, global head of macro and thematic research at Deutsche Bank. A downgrade of its credit into junk territory "would risk pressuring IG-only investors into forced sales," he said in a report.

S&P said in its July downgrade that another downgrade could be triggered by: an expectation that Oracle will sustain leverage exceeding 4x; or belief that the software company isn't on a path to generate positive free operating cash flow by fiscal 2029; or a negative view on Oracle's AI strategy or that of the overall AI industry.

As an investment-grade company, Oracle can borrow cheaply and with duration, but that would change with a junk rating, said Jamie Meyers, a senior securities analyst at Laffer Tengler, which owns Oracle stock.

"Nobody in high yield is going to buy a 30 year debt," he said. "Getting downgraded to junk would mean that they'd have to push everything short. Obviously, their borrowing rate would be higher, more than likely."

That said, Meyers is not concerned about Oracle's debt levels. In a meeting between Oracle and Laffer Tengler last year, Oracle stressed it will defend its investment-grade rating, Meyers said.

"We do believe the revenue is going to start ramping and the earnings are going to start ramping," he said. "What Oracle really needs is … time. They need to get these things built."

Brad Collins, a fixed income portfolio manager at Vanguard, also expressed confidence in Oracle and the other hyperscalers.

"Oracle is most under the microscope, but as a result, has been more diligent in their issuance" so far this year, he said. "Balance sheets are in a healthy starting spot, and [I] would not extrapolate what we are seeing in HY to IG."

The company's current troubles could be looked at as a "financing test," said Dynasty Financial Partners' Nerney. They'll either pass or fail, which could mean an additional downgrade, he said.

"The real question now is, with the move in rates, how much is that going to cost?" he said. "If rates continue to move higher, just the opportunity cost of investors to hold Oracle paper relative to other things in the market, you're going to see the market demand more."

Oracle responded to a request for comment by saying, "We have been very clear that maintaining an investment grade rating is our first priority as a company."

"The AI infrastructure business has strong economic returns and we expect it will produce strong free cash flows once projects are ramped," it added.