Oracle slips to BBB- as AI buildout drains cash

Oracle is now just one notch above junk status after S&P cut the company to BBB- on July 9, citing a $250 billion data-centre expansion that is consuming cash faster than new revenue can replenish it.

The pressure is already showing up in markets. Oracle shares fell nearly 6% on Thursday, while its 10-year bonds traded at yields of roughly 6.5%, according to Bloomberg — well above the average for BBB-rated debt and closer to the BB range associated with junk bonds.

Oracle has become the second-largest non-financial debt issuer in the Bloomberg US Corporate Bond Index after Amazon, with $117 billion outstanding. In the fiscal year ended May 31, the company’s free cash flow turned sharply negative, burning through nearly $24 billion after capital expenditure. S&P estimates that shortfall could widen to $42 billion as Oracle keeps building data centres at an unusually aggressive pace.

Moody’s has also assigned a negative outlook, suggesting a second major ratings agency sees meaningful risk in Oracle’s current trajectory. George Catrambone, head of fixed income at DWS Americas, told Bloomberg that investors are demanding a premium because of uncertainty over whether AI revenue will be enough to justify the debt load.

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A large part of that bet rests on a small number of customers. S&P estimates that about half of Oracle’s $638 billion in remaining performance obligations — its measure of contracted future revenue — is tied to OpenAI.

The company spent more than $55 billion on data centres in its last fiscal year and expects to raise another $40 billion through debt and equity this year, including $20 billion in stock sales at market prices. Oracle has also asked customers to pre-pay for computing components to ease the financing burden, and says prepaid and customer-supplied hardware for large AI contracts now totals $75 billion.

Oracle is hardly alone in borrowing heavily for AI infrastructure. Bloomberg says hyperscalers plan to spend as much as $725 billion on AI this year, while Big Tech’s combined AI debt has reached $350 billion. The difference is that Oracle does not have the same cash-flow buffer as its biggest peers: Google generated about $73 billion in free cash flow last year, while Oracle’s cash generation has deteriorated under the weight of capital spending.

Its cloud revenue grew 93% last quarter, but the core question is whether that growth arrives fast enough to keep the balance sheet from slipping further toward junk.