Oracle is in a bind. It wants to be a major player in the AI buildout, and that means building data centers. Oracle is currently undertaking a massive $250 billion data-center buildout.
The trouble is that cash is flying out the door faster than it comes in. Over the last four quarters, Oracle burned through more than $20 billion after capital expenditure. S&P Global Ratings reacted by downgrading Oracle's credit rating to BBB-, just one notch above speculative grade. Moody's Ratings assigns a negative outlook, indicating a potential downgrade in the medium term.
According to S&P, the free cash flow shortfall might expand to $42 billion over the next fiscal year.
Oracle's bonds are already showing the strain. Its 10-year debt currently yields about 6.4%, which represents a notable spread above the 10-year BBB curve's 5.7% yield.
Oracle's debt within the Bloomberg US Corporate Bond Index stands at roughly $117 billion, making it the second-biggest non-financial borrower in the index, trailing only Amazon.
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The dilemma was neatly summed up by SanJac Alpha's chief investment officer, Andrew Wells. "Oracle wants to hang on to that investment-grade rating, and to do that, they're going to have to show that they are not flooding the market with more supply. They're kind of on the ropes and they have to decide: Do they disappoint the bond investors or the equity investors?"
Last month, Oracle announced plans to raise approximately $40 billion via debt and equity this fiscal year, which includes a $20 billion at-the-market stock offering previously disclosed. In February, it issued $25 billion in investment-grade bonds.
George Catrambone at DWS Americas put it bluntly. "This is the beginning of a pushback, there is a cost of capital, it's not free."
The bottom line: The timing mismatch between upfront cash spending and future revenue recognition is a key focus. Oracle's management has promised to preserve the company's credit rating.
In contrast, other AI hyperscalers such as Alphabet Inc. and Meta Platforms Inc. generate ample cash to cover their investments. Google reported roughly $73 billion in free cash flow last year.
CreditSights predicts Oracle's capital expenditure will keep rising through at least fiscal 2029.
If the partnership generates real cash, the financial picture improves. Otherwise, Oracle might need to sell more equity, reduce capex, or do both.
Robert Schiffman, a tech credit analyst at Bloomberg Intelligence, put it this way. "People are starting to ask questions on how much debt capacity do they really have, and the answer starts becoming that they need to show progress in terms of AI monetization."
An Oracle spokesperson said the company remains "strongly committed to maintaining an investment-grade credit rating as our top capital allocation priority" and is concentrating on carrying out its strategic plan in the coming months and years.
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