S&P Global Ratings has downgraded Oracle's credit rating to BBB-, placing it just one notch above speculative junk status. This downgrade is primarily attributed to Oracle's aggressive $250 billion data-center expansion, which is causing the company to burn through cash far more rapidly than it generates revenue. In the fiscal year ended May 31, Oracle's free cash flow became deeply negative, with the company using nearly $24 billion after capital expenditures. S&P projects this deficit could worsen to $42 billion as the data center construction continues at an unprecedented pace.
Moody's Ratings has also assigned a negative outlook to Oracle, signaling that another credit cut is possible in the medium term. This reflects material risks in Oracle's current financial trajectory. The bond market is already reacting to these concerns, with Oracle's ten-year bonds yielding approximately 6.5%, significantly above the BBB index average and closer to the yield typically associated with BB-rated, or junk, territory. This yield gap suggests that investors are demanding a higher premium due to the uncertainty surrounding whether the anticipated AI revenue will ultimately justify the substantial debt being incurred.
Oracle is heavily concentrating its investments, with S&P estimating that roughly half of its $638 billion in remaining performance obligations, which is its measure of contracted future revenue, is tied to OpenAI. The company spent over $55 billion on data centers in its last fiscal year and plans to raise an additional $40 billion through debt and equity this year, including $20 billion in stock sales. While Oracle has requested customers pre-pay for computing components, accumulating $75 billion in prepaid and customer-supplied hardware for large AI contracts, the long-term impact on its credit rating will depend on how quickly its cloud revenue, which grew 93% last quarter, can offset its rising debt.
