oracle’s Five-year credit default swaps fell 17% as the software vendor’s plan to raise $50 billion in debt and equity boosted investors’ confidence that the company could avoid a credit downgrade as it finances its artificial intelligence development.
“Equity financing significantly dampens credit downside,” Barclays credit analyst Andrew Kechis said in a note to clients on Monday. Keches upgraded Oracle’s debt to overweight and said the company should further reduce its CDS.
Credit default swaps are like insurance for investors, with the buyer paying compensation in case the borrower is unable to repay the debt.
Oracle’s CDS soared late last year on concerns that the company’s large data center contracts would hurt its balance sheet and put bond investors at risk. Oracle raised $18 billion in a jumbo bond sale in September, one of the largest debt issuances in history in the tech industry.
The market sees five-year swaps as a way for investors to hedge their bets on the AI boom. Oracle has been in a “peak fear” cycle in recent months, Kesh wrote, with the market reacting negatively to virtually every headline.
Oracle on Sunday said it plans to raise $45 billion to $50 billion in debt and equity this year to build additional capacity to meet contract demand from cloud customers including Nvidia, Meta, OpenAI and Elon Musk’s xAI. Using equity as leverage is a notable signal to bond investors that the company is not relying solely on debt.
Oracle stock has fallen by half since its peak in September due to concerns related to the company’s financial plans and reliance on OpenAI. At least $300 billion of Oracle’s remaining $523 billion in performance obligations is related to OpenAI, according to analysts at DA Davidson.
Following the company’s quarterly earnings report in December, Oracle executives refrained from disclosing details of its comprehensive financing plan, hurting the stock and pushing up CDS prices.
While the latest funding announcement provided reassurance to bond investors, the stock price fell another 3% on Monday as the share issue dilutes value for existing shareholders, at least in the short term. Oracle is using an at-the-money approach and is likely to sell about 10% of its total volume in the coming weeks, traders told CNBC.
Analysts at UBS warned in a note that raising $20 billion to $25 billion from a stock sale “may not be welcomed by all stockholders.”
