While equity investors have propelled Oracle Corporation’s stock to dizzying new heights in 2024, a distinct quiet alarm is sounding on the credit trading desks of Wall Street. The divergence between the company’s soaring share price and the growing anxiety in its credit default swap (CDS) spreads highlights a fundamental tension in the current technology sector: the immense cost of funding the artificial intelligence revolution. According to a recent research note from Morgan Stanley, the cost to insure Oracle’s debt against default has climbed significantly, approaching levels not seen since the height of the COVID-19 panic in 2020. This widening spread suggests that while stock pickers see growth, bondholders see leverage risk.

The core of Morgan Stanley’s concern lies in the sheer magnitude of capital required to compete in the generative AI space. Unlike its hyperscaler rivals—Microsoft, Amazon, and Google—Oracle is operating with a balance sheet that is already heavily laden with leverage. The investment bank’s analysts point out that Oracle’s five-year CDS spreads have widened to approximately 55 basis points. This movement is idiosyncratic; it is happening even as spreads for the broader investment-grade technology sector have generally tightened. As reported by Slashdot, citing Bloomberg data, this pricing anomaly indicates that credit markets are pricing in a higher probability of debt-funded expansion than the equity markets seem to acknowledge.

The Widening Chasm Between Stock Performance and Credit Risk

The juxtaposition of Oracle’s equity and credit narratives is stark. On one side of the ledger, Oracle shares have outperformed much of the software index this year, driven by the narrative that Oracle Cloud Infrastructure (OCI) is finally winning significant market share due to its GPU availability and flexible networking architecture. However, the fixed-income market is focused on the liquidity mechanics required to sustain that growth. Morgan Stanley’s warning is predicated on the expectation that Oracle may need to return to the primary bond market to finance its capital expenditures (CapEx), which are projected to double in the coming fiscal year. The fear is not of imminent insolvency, but of a supply probing event where a fresh deluge of paper cheapens existing bonds.

This skepticism from credit traders is rooted in the company’s cash flow dynamics. While Oracle generates substantial free cash flow, the pivot to becoming a primary AI infrastructure provider is capital-intensive in a way that legacy software businesses are not. Building gigawatt-scale data centers and procuring thousands of NVIDIA H100 clusters requires upfront cash outlays that dwarf traditional maintenance CapEx. As noted in coverage by Bloomberg, the market is effectively demanding a higher premium to hold Oracle debt because the path to AI supremacy is paved with borrowed money. The credit market is signaling that the “margin of safety” is thinning, even if the growth story remains intact.

Capital Expenditure Intensity in the Era of Generative Models

The race to build out AI infrastructure has fundamentally altered the financial profile of the cloud industry. For Oracle, this means transitioning from a business model reliant on high-margin software maintenance fees to one that involves heavy industrial construction and hardware procurement. Larry Ellison, Oracle’s co-founder and chairman, has been vocal about the company’s ambition to build massive data centers, some potentially powered by small modular nuclear reactors. While visionary, these projects require capital deployment on a scale that rivals utility companies. The credit protection costs are rising because bondholders are wary of the execution risk associated with such massive physical infrastructure projects.

Furthermore, the timing of this spending spree coincides with a “higher-for-longer” interest rate environment. Unlike the zero-interest-rate policy era that fueled the initial cloud boom, Oracle must now finance its expansion at significantly higher costs of capital. Analysts at Reuters have observed that for companies with existing debt piles, the cost of servicing new debt to fund AI expansion can erode net margins. Oracle’s aggressive CapEx guidance suggests they are betting the farm on AI demand remaining insatiable for years to come. If demand softens, or if pricing power in the GPU rental market compresses, the return on invested capital (ROIC) could disappoint, leaving the company with higher leverage ratios than the rating agencies are comfortable with.

The Lingering Financial Weight of the Cerner Acquisition

Contextualizing the current credit anxiety requires looking back at the $28 billion acquisition of Cerner. This deal, intended to cement Oracle’s foothold in the healthcare vertical, significantly increased the company’s gross debt, which currently hovers around $87 billion. While Oracle has been diligent about paying down this debt over the past several quarters, the renewed need for AI CapEx threatens to stall or reverse that deleveraging progress. The credit market hates uncertainty, and the shift from “paying down debt” to “ramping up spending” is a classic trigger for widening CDS spreads.

The integration of Cerner has also been complex, with the company working to modernize Cerner’s legacy code base and move it to OCI. While this creates long-term synergies, the immediate financial reality is a balance sheet that lacks the fortress-like quality of a Microsoft or Google. As detailed in reports by The Wall Street Journal, credit rating agencies monitor these leverage ratios closely. Any indication that Oracle might prioritize aggressive infrastructure build-outs over debt reduction could trigger negative outlook revisions, further increasing the cost of capital and validating the concerns currently reflected in the CDS market.

Strategic Partnerships and the Race for Cloud Capacity

Despite the financial headwinds, Oracle’s operational strategy has garnered respect even from competitors. The company has signed landmark multi-cloud agreements with Microsoft Azure, Google Cloud, and Amazon Web Services, effectively allowing OCI database services to run inside competitor data centers. This ubiquity is a powerful growth driver, but it also necessitates the very infrastructure spending that bondholders fear. To fulfill these contracts and the backlog of AI training demand, Oracle must have the hardware ready and online. The demand is real; the question is strictly about the financing mix used to meet it.

The backlog of Remaining Performance Obligations (RPO) has surged, growing over 50% year-over-year in recent quarters. This metric is the bullish counter-argument to the bearish credit signals. Equity analysts argue that the debt is “good debt” because it is directly tied to signed contracts and guaranteed revenue. However, credit analysts are naturally more conservative. They look at the execution timeline and the cash burn rate. According to analysis from CNBC, the sheer velocity of the required spend means Oracle might be cash flow negative after CapEx in certain quarters, necessitating external financing. This potential liquidity gap is precisely what the rising CDS prices are hedging against.

Sovereign Clouds and the Quest for Gigawatt-Scale Power

A unique aspect of Oracle’s strategy is its focus on “Sovereign AI”—building dedicated cloud regions for national governments to train models on their own data within their own borders. This creates a sticky, high-compliance customer base, but it also fragments infrastructure investment. Instead of just building mega-campuses in Virginia or Oregon, Oracle is deploying capital globally in jurisdictions with varying risk profiles. This geopolitical diversification adds another layer of complexity to the credit profile, as the company navigates regulatory environments and power grid limitations across multiple continents.

The power constraint is perhaps the most tangible physical risk. Larry Ellison’s recent comments about designing data centers that consume over a gigawatt of power—and the potential use of nuclear energy to fuel them—underscore the physical reality of the AI era. While these plans are technologically ambitious, they are financially front-loaded. Sourcing power, securing permits, and building the physical shell of a data center happens years before the revenue flows in. As noted by The Financial Times, utilities are struggling to keep up with data center demand, forcing tech companies to fund energy infrastructure themselves. For a company with Oracle’s leverage, becoming a de facto energy developer adds a layer of capital intensity that credit markets are right to scrutinize.

The Bond Market’s Vigilance Amidst Tech Euphoria

The divergence between Oracle’s stock price and its credit protection costs serves as a microcosm for the broader market’s struggle to price the AI boom. Equity markets are discounting future growth, assuming that the massive investments will yield exponential returns. Credit markets, by contrast, are focused on the downside protection and the immediate burden of the balance sheet. The Morgan Stanley warning is not necessarily a prediction of doom, but a rational assessment of risk: Oracle is leveraging up to fight a war against competitors with deeper pockets.

Ultimately, the widening CDS spreads act as a governor on the company’s ambitions. If the cost of debt rises too high, it creates a natural limit on how fast Oracle can expand its physical footprint. For industry insiders, the metric to watch over the next two quarters is not just revenue growth, but the ratio of Free Cash Flow to Total Debt. If Oracle can manage to fund its GPU ambitions while keeping its leverage ratios from expanding further, the credit spreads will normalize. If not, the bond market’s current anxiety may prove to be a prescient warning that the cost of the AI revolution is higher than the equity markets have priced in.