Oracle (ORCL) Stock: Credit Risk Soars as Morgan Stanley Raises Red Flags on AI Spending

TLDR

• Credit default swap costs for Oracle hit 1.25 percentage points, the highest in three years
• Morgan Stanley warns costs could reach 2 percentage points without financing clarity
• Oracle raised $18 billion in bonds and is tied to $56 billion in data center loans
• Investors and banks are heavily hedging against Oracle’s debt
• December 15 earnings call expected to provide crucial funding details

Oracle faces mounting pressure in the credit market as the cost to insure its debt reaches levels not seen since 2021. Morgan Stanley analysts are sounding warnings about the tech company’s aggressive AI spending.

The five-year credit default swaps for Oracle climbed to 1.25 percentage points in November. These swaps act as insurance against potential default.

Oracle Corporation, ORCL

Morgan Stanley analysts Lindsay Tyler and David Hamburger say this number could climb higher. Without clear communication about financing plans, the cost could hit 1.5 percentage points soon.

By 2026, it might even approach 2 percentage points. That would match the peak from the 2008 financial crisis when Oracle’s CDS hit 1.98 percentage points.

The root cause is Oracle’s massive spending on artificial intelligence infrastructure. The company borrowed $18 billion through the bond market in September.

But the borrowing didn’t stop there. Banks arranged an $18 billion project loan for a New Mexico data center campus. Oracle will occupy the facility as a tenant.

Loan Packages Fuel Hedging Activity

Another $38 billion loan package is in the works. This money will fund data centers in Texas and Wisconsin developed by Vantage Data Centers.

These construction loans are driving banks to hedge their exposure. Morgan Stanley says this hedging activity is pushing up the cost of credit default swaps.

The analysts noted that construction loans have become a bigger driver of hedging than initially expected. Banks want protection in case things go wrong.

Oracle’s CDS have underperformed the broader investment-grade index. The company’s bonds have also lagged the Bloomberg high-grade index.

Even Oracle’s stock is feeling the pressure. This might force management to address investor concerns.

All Eyes on December Earnings

Oracle reports second quarter fiscal 2026 results on December 15. Analysts expect earnings of $1.64 per share on revenue of $16.20 billion.

Morgan Stanley believes this earnings call will be critical. Investors want details on how Oracle plans to fund its AI expansion.

Questions remain about the Stargate project and overall capital spending plans. Without answers, credit concerns will likely persist.

Morgan Stanley shifted its trading recommendation. The firm previously suggested buying Oracle bonds and credit default swaps together.

Now they recommend buying credit protection alone. They closed the bond-buying portion of their trade.

The analysts believe this approach offers a cleaner way to profit from widening spreads. Credit derivatives are expected to move more than the bonds themselves.

Oracle declined to comment on Morgan Stanley’s report. The stock closed at $204.96 on November 26, gaining 4.02% for the session.

The December earnings call will show whether Oracle can ease investor fears about its debt load and AI spending plans.

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