TLDR
- Oracle’s five-year credit default swaps reached 1.25 percentage points in November
- Morgan Stanley projects costs could hit 2 percentage points in 2026 without transparency
- The company has $18 billion in new bonds plus $56 billion in data center construction loans
- Heavy hedging by banks and investors is driving up protection costs
- December 15 earnings report will be crucial for outlining financing strategy
Oracle is facing increased scrutiny in the credit markets as concerns grow over its artificial intelligence spending. The cost to protect against an Oracle default has climbed to its highest point since 2021.
Credit default swaps for Oracle hit 1.25 percentage points this month. Morgan Stanley analysts Lindsay Tyler and David Hamburger warn the situation could worsen.
The analysts predict these costs could break through 1.5 percentage points in the near term. If Oracle remains vague about its financing plans, the number could approach 2 percentage points next year.
That level would match the company’s 2008 peak of 1.98 percentage points during the financial crisis. The comparison has investors on edge.
Oracle’s spending spree is fueling the concerns. The company raised $18 billion through the bond market in September to fund its AI plans.
Additional borrowing followed quickly. Banks put together an $18 billion project loan for a New Mexico data center where Oracle will be the main tenant.
Construction Loans Drive Market Anxiety
A separate $38 billion loan package is also in progress. This financing will support Vantage Data Centers facilities in Texas and Wisconsin that Oracle plans to use.
Morgan Stanley says these construction loans are the main reason for increased hedging activity. Banks involved in the deals are buying protection against potential losses.
The analysts wrote that construction loans have emerged as a greater driver of hedging than expected. This trend will likely continue as more projects move forward.
Some hedges might disappear when banks distribute portions of the loans to other investors. However, those new investors may set up their own hedges.
Oracle’s credit default swaps have performed worse than the overall investment-grade market. The company’s bonds have also trailed the Bloomberg high-grade index.
Stock performance is starting to reflect these worries. This pressure could prompt Oracle executives to share more details about their plans.
December Earnings Hold the Key
Oracle will announce second quarter fiscal 2026 results on December 15. Wall Street forecasts earnings of $1.64 per share on revenue of $16.20 billion.
Morgan Stanley views this earnings call as particularly important. Investors are looking for a concrete explanation of how Oracle will fund its expansion.
Details about the Stargate project remain scarce. Capital spending plans also need clarification.
The analysts changed their strategy recommendation. They previously advised buying both Oracle bonds and credit default swaps in tandem.
Morgan Stanley now recommends focusing solely on buying credit protection. They dropped the bond purchase from their trade idea.
This shift reflects their belief that credit default swaps will move more dramatically than bonds. The protection-only approach offers a simpler way to capitalize on widening spreads.
Oracle representatives declined to provide comment on the Morgan Stanley analysis. Shares closed at $204.96 on November 26, up 4.02% for the day.
The company’s December earnings call will determine whether management can calm investor nerves about its debt levels and AI infrastructure investments.
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