Oracle Corp Credit Rating Cut to BBB- on AI Spending

What happened

S&P Global Ratings downgraded Oracle's credit rating to BBB- from BBB on July 9, moving the company to just one notch above junk status. The ratings agency stated it "underestimated the scale of the investments required to expand the AI business" and the impact on Oracle's overall creditworthiness. Oracle has been burning cash faster than it generates revenue, with free cash flow deficits exceeding $20 billion over the last four quarters after capital expenditure. The company reported fiscal year 2026 capital expenditures of $55.7 billion, surpassing its initial $50 billion guidance. S&P projects Oracle's free cash flow deficit could widen to $42 billion in fiscal 2027. Moody's Ratings has placed a negative outlook on Oracle, signaling another potential downgrade over the medium term. Oracle's five-year credit default swaps reached multi-year highs, and its existing bonds sold off, with 10-year bonds yielding about 6.4%, closer to BB-rated (junk) levels than BBB peers at 5.7%. The company plans to raise about $40 billion through debt and equity in the current fiscal year, including a previously announced $20 billion at-the-market stock sale. Oracle currently has about $117 billion of debt, making it the second-largest nonfinancial corporate bond issuer after Amazon.

Why it matters

Oracle's deteriorating credit profile threatens its ability to fund its ambitious AI infrastructure expansion without falling into junk territory, which would significantly increase borrowing costs and potentially restrict access to capital markets. The company faces a critical challenge: unlike AI competitors such as Alphabet and Meta, which generated substantial positive free cash flow (Google posted $73 billion last year), Oracle must deploy massive upfront capital for data centers while waiting for contracted revenue to materialize over time. This timing mismatch leaves Oracle vulnerable, particularly given that roughly half of its $638 billion in remaining performance obligations (contracted future revenue) is tied to a single partner, OpenAI, according to S&P estimates. A downgrade to junk status by at least two ratings firms would force Oracle into the smaller high-yield market, increasing borrowing costs and potentially undermining customer confidence in its database business, where clients depend on the company's financial stability for their critical data operations. Oracle must now choose between disappointing bond investors by issuing more debt or equity investors by cutting capital expenditure, both costly options that could hinder its competitiveness in the AI infrastructure race.

Bigger picture

Oracle's credit strain stands in stark contrast to other hyperscalers in the AI infrastructure arms race. Companies like Alphabet, Meta, Microsoft, and Amazon collectively plan to spend as much as $725 billion this year on AI data center equipment, but they generate enough cash to fund investments without credit stress. Morgan Stanley estimates five major tech companies will invest more than $1.2 trillion in AI next year, exceeding U.S. defense spending. Oracle's situation resembles that of SpaceX, whose bonds have traded poorly since debut due to expected cash burn through 2030, rather than cash-rich peers. The broader AI infrastructure sector is discovering that regulatory hurdles, power infrastructure bottlenecks, and budget overruns can materially alter return profiles. Oracle's legal battle with Wisconsin regulators over financial guarantees exceeding $100 million annually for its $15 billion Lighthouse data center campus highlights how state authorities are demanding protection for ratepayers against the risk of stranded power plant investments. The case underscores a growing tension: as AI infrastructure spending accelerates, companies with weaker credit profiles face higher regulatory scrutiny and financing costs, potentially widening the competitive gap with better-capitalized rivals.

What to watch

Investors should monitor Oracle's next capital raise through debt or equity offerings to gauge whether the company can fund its $250 billion data center expansion without further credit downgrades. Watch for any announcements regarding capital expenditure adjustments or changes to the $165 billion long-term investment plan for Project Jupiter near El Paso. Track the outcome of Oracle's lawsuit against Wisconsin regulators, which could set a precedent for financial guarantee requirements at other data center sites. Pay attention to S&P and Moody's rating actions, as a downgrade to junk by at least two agencies would significantly increase Oracle's borrowing costs and force it into the high-yield market. Monitor Oracle's quarterly free cash flow performance against S&P's $42 billion deficit projection for fiscal 2027. Watch for updates on OpenAI's financial health and ability to meet contractual obligations, given that roughly half of Oracle's $638 billion backlog depends on this partnership. Finally, observe whether Oracle can demonstrate progress in monetizing its AI investments to convert its large contract backlog into actual revenue and cash flow.