The cost of insuring Oracle’s debt against default has spiked following its latest earnings report, reigniting concerns about corporate spending on artificial intelligence and the surge in borrowing used to finance it. Oracle, a multinational computer technology corporation that sells database software and technology, cloud engineered systems, and enterprise software products, has seen its debt pile grow to just over $100 billion. This makes it a bellwether for market sentiment regarding AI, as worries of a potential bubble in the sector increase amidst rising tech stock values.
Trading in Oracle’s credit default swaps (CDS), derivatives that offer insurance against the risk of a bond issuer failing to pay creditors, has surged in the past year and is now near record highs. This presents a less optimistic picture compared to Oracle’s share performance. According to Depositary Trust & Clearing Corporation (DTCC) data, Oracle ranks in the top 20 for corporate CDS trading, with a daily notional average of $75 million in the third quarter, a 650% increase from the previous year.
Despite the overall CDS market for single issuers being valued at around $9 trillion globally, and Oracle’s significant increase in CDS trading, the market can be volatile. DTCC data indicates that the average daily CDS trades can be in the single digits, even for large companies. This thin trading environment means even small CDS trades can have a disproportionate impact on prices.
Currently, Oracle CDS trade around 126 basis points, according to S&P Global Market Intelligence data. This is significantly higher than other AI-linked companies like Nvidia, trading around 37 bps, and Meta, trading near 50 bps, according to LSEG data. Credit events that trigger CDS payouts include bankruptcy or failure to make bond payments. The rise in Oracle’s CDS costs reflects increasing market apprehension about the company’s debt and its exposure to the AI sector.
