Oracle’s 5-year credit default swaps tumbled 17% after the software vendor’s plan to raise $50 billion in debt and equity bolstered investor confidence that the company will be able to avoid a credit downgrade as it funds its artificial intelligence buildout.
“Equity financing significantly inhibits the downside for credit,” Andrew Keches, a credit analyst at Barclays, wrote in a note to clients on Monday. Keches upgraded Oracle’s debt to overweight and said that its CDS should compress further.
Credit default swaps are like insurance for investors, with buyers paying for protection in case the borrower can’t repay its debt.
Oracle’s CDS soared late last year on concerns that the company’s massive data center commitments would damage its balance sheet, putting debt investors at risk. Oracle raised $18 billion in a jumbo bond sale in September, one of the largest debt issuances on record in the tech industry.
The 5-year swaps have been viewed by the market as a way for investors to hedge their bets on the AI boom. Oracle has been caught in a “peak fear” cycle for the past couple months, with the market reacting negatively to virtually any headline, wrote Keches.
Oracle said on Sunday it planned to raise $45 billion to $50 billion in debt and equity this year to build additional capacity to meet contracted demand from its cloud customers, which include Nvidia, Meta, OpenAI and Elon Musk’s xAI. Using equity as a lever is a notable signal to bond investors that the company isn’t solely reliant on debt.
Shares of Oracle are down by half since they peaked in September on fears tied to the company’s financing plans and its dependency on OpenAI. At least $300 billion of Oracle’s $523 billion in remaining performance obligations is tied to OpenAI, according to analysts at D.A. Davidson.
Following the company’s quarterly earnings report in December, Oracle executives held back from detailing a comprehensive financing plan, hurting the stock, and pushing up CDS prices.
While the latest funding announcement instilled confidence among debt investors, the stock slid another 3% on Monday because the issuance of equity will dilute existing shareholders, at least in the near term. Oracle is using an at-the-money offering that will likely entail selling about 10% of its total traded volume over the next few weeks, traders told CNBC.
UBS analysts warned in a note that raising $20 billion to 25 billion from stock sales “may not be warmly received by all equity holders.”