Oracle Headquarters in Redwood Shores. Photo: Jason Doiy/ALM

A measure of Oracle Corp.’s credit risk reached a 16-year high today after the database company’s spending on data centers and other equipment raised fresh doubts about how quickly the firm can generate a profit from its huge artificial intelligence (AI) investments.

The cost of protecting the company’s debt against default for five years rose as much as 0.17 percentage point—to around 1.41 percentage point a year—the highest intraday level since April 2009, according to ICE Data Services. The gauge rises as investor confidence in a company’s credit quality falls. Oracle credit derivatives have become a credit market barometer for AI risk.

The spread on Oracle’s 6 percent bond due 2055 widened 20 basis points (bps), to 196 bps, according to Trace data.

“Oracle really matters because it is the harbinger of the AI capex boom,” William Smith, senior vice president and director of credit at AllianceBernstein LP, said on Bloomberg TV yesterday. “This repricing in debt markets is very consistent with the view that risks are building.”

Shares of the Austin-based company declined about 13 percent in premarket trading.

Oracle is among the tech giants borrowing heavily to build AI data centers. Banks involved in construction loans linked to Oracle have been buying credit default swaps (CDS) on the company’s debt to hedge their exposure. Investors and hedge funds have also boosted their hedging amid fears that Oracle’s rising leverage is hurting its credit metrics and may push the company into high-yield status.

Yesterday, Clay Magouyrk, one of Oracle’s two CEOs, said that the company is committed to maintaining its investment-grade debt rating. Trading volume on Oracle’s CDS surged to about $9.2 billion over the 10 weeks ended December 5, according to an analysis of trade repository data by Barclays Plc credit strategist Jigar Patel. That’s up from $410 million in the same period last year.

Oracle burned through cash in the past quarter, hurt by its heavy capital expenditures. Meanwhile, the company has more than $100 billion of debt.

When asked exactly how much money Oracle will have to raise to finance its increasing data center footprint, Oracle’s Magouyrk said the company has a variety of financing options, and it will probably borrow less than analysts are projecting.

In November, Morgan Stanley credit analysts cautioned that Oracle’s CDS price could top 1.5 percentage point in the near term and could approach 2 percentage points if communication around its financing strategy remains limited. The company faces risks including a funding gap, a swelling balance sheet, and obsolescence, credit analysts Lindsay Tyler and David Hamburger, wrote.

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