After the New York Times reported Nvidia CEO Jensen Huang’s second affair yesterday and the Wall Street Journal reported his board of directors’ preparations to fire him, concerns about tech company Oracle and its reliance on the US processor titan have gone parabolic.
Oracle shed $10 billion in market capitalization during after-hours trading yesterday alone, worsening declines for common shareholders that now exceed 10% over the past month and 35% year-to-date.
On October 28, Oracle pledged that new stock and bond sales through fiscal 2030, excluding refinancing, would be capped at $20 billion. On November 2, it agreed to sell 86 million new shares for $10 billion and priced $10 billion of bonds.
That committed the entire four-year budget in one day.
Unfortunately, as anyone begins to max out their credit like Oracle is doing with its massive bond offerings, it typically becomes more expensive to borrow.
A higher US Federal Reserve benchmark interest rate certainly hasn’t helped, either.
Oracle’s rising borrowing costs
Oracle has had to incentivize bond traders with far more generous coupons to sell its corporate bonds this month versus its offerings just nine months ago.
In February, Oracle sold 2029 notes with a yield (technically, yield-to-maturity) of 4.6%. The company had to sell bonds with the same maturity year in November offering a 7% yield.
Yield on a corporate bond is definitely not a good figure to have to increase.
Higher US Treasury bond yields explain part of that jump, but Oracle’s bond premium above Treasuries has jumped from 0.95 to 2.40 percentage points — a decisive move in the wrong direction.
On its 2046 maturity bond sales that Oracle sold in November versus February of this year, yield-to-maturity rose from February’s 6.56% to 8.67% in November.
Most concerningly, traders are beginning to speculate on Oracle’s outright default on the debts it’s amassing. Specifically, Oracle’s five-year credit default swaps traded near 305 basis points last week, up 5x from 58 one year prior.
Read more: AI companies rush to borrow cash as stocks crash
More bad Nvidia news could push Oracle into ‘junk’ territory
Fresh AI industry setbacks and an obviously rising cost to borrow have investors watching the clock on a potential Oracle downgrade to “junk,” i.e. non-investment grade status by a credit ratings agency.
S&P already rates Oracle just one rung above junk at “BBB-.” Moody’s and Fitch rate Oracle two notches above junk, although Moody’s has a negative outlook on the company.
Any of the three independent ratings agencies could slash its rating at any time.
In July, when S&P Global Ratings cut Oracle’s creditworthiness to BBB-, analysts forecasted leverage in the mid-4x area for fiscal 2027. Mid-4x is well above its preferred mid-3x threshold for considering any credit rating improvement.
With a negative outlook at Moody’s, a leverage ratio too stretched for S&P’s liking, and an avalanche of negative news this week from Nvidia, Oracle’s downward-sloping stock chart seems to be pointing to an obvious trend.
More bad news for an AI giant
Things keep getting worse for Oracle. Microsoft itself is winding down its rentals of Oracle AI compute.
In addition, Oracle’s OpenAI data center in New Mexico also faces an “open-ended” (a euphemism for “indefinite”) permit delay.
That site, Project Jupiter, has had a terrible few days.
On Monday, state regulators blamed the permitting delay on its power developer missing procedural deadlines. On Tuesday, Doña Ana County voted to warn the project’s backers they may be in breach of contract — and that was its second warning within a month.
Buildings already constructed on Oracle’s data center site lack power.
Obviously, recouping lost revenue while servicing empty buildings is stretching Oracle’s already stretched balance sheet.
Will Nvidia CEO news be the straw that breaks Oracle’s back?
Oracle’s revenue mix is terrible. Indeed, a single company, OpenAI, contributes roughly half of its revenue backlog.
S&P analysts didn’t mince words when they warned, “Oracle’s AI strategy carries material credit risks given the aggressive spending and uncertain path to positive cash flow.”
Oracle counterargued, “Demand for [Oracle’s] AI infrastructure remains strong, including for earlier-generation GPUs.”
S&P said it could cut Oracle again if the company’s leverage ratio set to stay above 4.5x, or if positive free cash flow by fiscal 2029 begins to look out of reach.
As of Wednesday, a thinly-traded Polymarket contract priced about a 36% chance that analysts at Moody’s or S&P cut Oracle to junk by June 30, 2027.
In July, S&P called an upgrade “unlikely over the next two years.”
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