Credit risk around Oracle is heating up fast and the market is not hiding it.
In November, a key risk gauge tied to Oracle debt hit a three-year high, and Morgan Stanley says the real damage may land in 2026 if the company fails to calm fears tied to its massive artificial intelligence spending rush.
The warning is blunt. The pressure is tied to how fast the balance sheet is growing, how wide the funding gap looks, and how fast parts of the business could turn outdated.
The cost to insure Oracle debt against default for the next five years climbed to 1.25 percentage point per year on Tuesday, based on ICE Data Services.
That move puts the company’s five-year credit default swap near levels last seen during past stress cycles. Analysts Lindsay Tyler and David Hamburger say the stockpile of debt, paired with limited clarity on how it will all be funded, is a core threat staring at investors right now.
Banks stack hedges as AI loans explode
The five-year CDS on Oracle now sits uncomfortably close to the record set in 2008, when it hit 1.98 percentage points, according to ICE Data Services.
The analysts say the CDS could break 1.5 percentage point soon and may push toward 2 percentage points if the company keeps tight on details about how it plans to fund its buildout into the new year.
That risk line is driven by one brutal fact. Oracle is now a front-line name in the AI spending race, and the credit market treats it as a direct barometer for AI risk.
In September, Oracle raised $18 billion in the US investment-grade bond market.
In early November, about 20 banks lined up to arrange a separate $18 billion project finance loan for a massive data center campus in New Mexico, where Oracle will take control as the future tenant.
On top of that, another $38 billion loan package is in motion to fund data center projects in Texas and Wisconsin built by Vantage Data Centers, according to Bloomberg.
Morgan Stanley says the banks tied to these construction loans are a major driver behind the recent surge in trading volume on Oracle CDS, and they do not expect that activity to cool off soon. The analysts wrote, “Over the past two months, it has become more apparent that reported construction loans in the works, for sites where Oracle is the future tenant, may be an even greater driver of hedging of late and going forward.”
They also flagged a risk that some bank hedges could unwind if lenders sell down pieces of these loans to outside buyers.
Even if that happens, they made clear that other players could step in later and add new hedges of their own. The funding needs tied to these sites do not stop with New Mexico or the Vantage builds. More construction spending still sits ahead.
Traders ditch bonds and load up on CDS
Last month, the same analysts said they expect near-term credit deterioration and rising uncertainty to keep pushing bondholders, lenders, and thematic traders deeper into hedging mode.
They added, “The bondholder hedging dynamic and also the thematic hedging dynamic could both grow in importance down the road.”
So far, that call is playing out in the data. Oracle CDS have underperformed the broader investment-grade CDX index. At the same time, Oracle corporate bonds have also lagged the Bloomberg high-grade bond index as hedging demand rises and market mood weakens. The pressure is no longer limited to credit. Oracle stock has started to feel the weight as well.
The analysts say this rising strain could push management to lay out a clearer financing plan on the next earnings call, including updates tied to Stargate, data centers, and capital spending.
Until now, Morgan Stanley had pushed a basis trade, telling investors to buy Oracle bonds and buy CDS protection at the same time. The idea was to profit from derivatives widening more than cash bonds. That play is now off. The firm says the setup has changed and the cleanest move is no longer split exposure.
They wrote, “Therefore, we are closing the ‘buy bond’ part of the basis trade, and keeping the ‘buy CDS protection’ leg of it.” They added, “We think a trade in CDS outright is cleaner right now and will result in a greater spread move.”
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