The Connection Between Oracle’s Credit Default Swaps and AI

Questions surrounding a potential AI bubble remain front and center as companies continue to commit unprecedented levels of capital expenditures. Oracle is a prime example. Its 5-year credit default swap (CDS) has risen roughly 310% since the end of June, pushing perceived credit risk to a 16-year high. Rising leverage has begun to pressure the company’s credit profile, increasing the risk of a downgrade into high-yield territory. 

As a result, investors are increasingly viewing Oracle’s 5-year CDS as the preferred hedge against excesses in the AI capex cycle. In other words, Oracle is positioned as a bellwether for the broader AI boom. Meanwhile, Oracle’s stock is down approximately 42% from its highs this year, with the selloff exacerbated by management’s reaffirmation of elevated spending levels in its latest earnings release. Total debt now exceeds $100 billion. 

Adding to the concern, recent disclosures revealed new lease commitments of $248 billion, primarily tied to data centers and cloud capacity arrangements, representing a sharp increase from prior filings. While management reiterated its commitment to maintaining the company’s current credit rating, those assurances have done little to calm investor unease. 

Going forward, investors should closely monitor AI-related capex trends and how the market reacts, as these trends will likely to remain a key barometer for sentiment surrounding the sustainability of the AI investment narrative. 

Source: Bloomberg. 

Sebastian Teper contributed to this article.