Oracle’s Rising Credit Stress Signals Broader AI Sector Risks

Oracle's credit default swaps have surged to a three-year high, with five-year protection costs hitting 1.25 percentage points—approaching crisis-era levels. Morgan Stanley warns the real reckoning may come in 2026 if the company fails to articulate a credible funding plan for its aggressive AI infrastructure expansion.

The debt market is treating Oracle as a bellwether for AI-related credit risk. Its September 2023 $18 billion debt issuance now appears prescient as hedging costs creep toward 2008's record 1.98 percentage points. Analysts see 1.5 percentage points as the next threshold, potentially reaching 2 percentage points without clearer capital allocation disclosures.

This stress reflects a fundamental tension: Oracle's AI ambitions require massive upfront investment while legacy businesses face obsolescence risks. The company's balance sheet expansion and funding gap have become key investor concerns, mirroring broader sector anxieties about capital-intensive AI development cycles.