Oracle’s S&P downgrade fueled by AI data-center cash burn
▼ Summary
– S&P downgraded Oracle to BBB-, one notch above junk, due to a $250 billion data-centre expansion burning cash faster than revenue can replace it.
– Oracle’s free cash flow turned deeply negative, burning nearly $24 billion last fiscal year, with S&P estimating the deficit could widen to $42 billion.
– Oracle’s ten-year bonds yield about 6.5%, above the BBB average and closer to junk territory, reflecting investor uncertainty about AI revenue justifying the debt.
– Roughly half of Oracle’s $638 billion in remaining performance obligations is tied to OpenAI, and the company spent over $55 billion on data centres last fiscal year.
– Oracle lacks the cash-flow cushion of peers like Google, relying on customer prepayments of $75 billion to offset financing, with its cloud revenue needing to catch up to borrowing.
S&P Global Ratings cut Oracle’s credit rating to BBB- on July 9, leaving the software giant just one notch above junk status. The downgrade reflects a massive $250 billion data-center expansion that is consuming cash far faster than revenue can replenish it. A $117 billion debt load makes Oracle the second-largest non-financial issuer in the Bloomberg US Corporate Bond Index, trailing only Amazon. Shares dropped nearly six percent Thursday as bond investors began pricing Oracle’s debt closer to speculative-grade levels.
Oracle’s free cash flow turned deeply negative in the fiscal year ending May 31, with the company burning through nearly $24 billion after capital expenditures. S&P projects that deficit could widen to $42 billion as the company maintains its breakneck pace of data-center construction. Moody’s has also assigned a negative outlook, signaling that a second major ratings agency sees material risk in Oracle’s financial trajectory.
The bond market is already behaving as if further downgrades are coming. Oracle’s ten-year bonds yield approximately 6.5%, well above the BBB index average and closer to the BB range that defines junk territory, according to Bloomberg. George Catrambone, head of fixed income at DWS Americas, told Bloomberg that the spread reflects investor demand for a premium given the uncertainty around whether AI revenue will ultimately justify the mounting debt.
The bet is heavily concentrated. S&P estimates that roughly half of Oracle’s $638 billion in remaining performance obligations, a measure of contracted future revenue, is tied to OpenAI. Oracle spent more than $55 billion on data centers in its last fiscal year and expects to raise another $40 billion through debt and equity this year, including $20 billion in stock sales conducted at market prices.
Oracle is hardly alone in loading up on debt for AI infrastructure. Hyperscalers collectively plan to spend up to $725 billion on AI this year, and Big Tech’s combined AI debt has already reached $350 billion, according to Bloomberg. But Oracle lacks the cash-flow cushion that protects its peers. Google posted roughly $73 billion in free cash flow last year, while Oracle’s cash generation has collapsed under the weight of its capital spending.
Oracle has asked customers to pre-pay for computing components to help offset the financing burden, and says prepaid and customer-supplied hardware for large AI contracts now totals $75 billion. Whether that is enough to prevent a further downgrade depends on how quickly its cloud revenue, which grew 93 percent last quarter, can catch up with its borrowing. The company is staking everything on AI demand sustaining at levels that justify turning one of the most leveraged balance sheets in tech into something even more leveraged.
(Source: The Next Web)
