Oracle bonds sell off as AI investment fuels investor concerns

By Matt Tracy

(Reuters) -Oracle bonds have taken a hit in recent days following a report that the cloud and artificial intelligence service provider plans to add another $38 billion to its heavy debt load to fund its AI infrastructure, according to analysts and investors.

Oracle has invested billions of dollars to build its cloud and AI infrastructure this year. With roughly $104 billion in debt outstanding, including $18 billion in bonds, the company is spending more than it earns from operations as it bets on future profits through contracts with startups such as OpenAI.

"What's interesting is most of the (major tech) companies are trying to sustain their (stock) buyback programs at the same time that they're spending on capex currently and to do that, they're actually borrowing and so they're using debt," said Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management.

Renewed questions about the safety of this bet appeared to have surfaced in trading of Oracle's bonds this week, following reporting by CNBC on Thursday that Oracle plans to assume an additional $38 billion in debt.

The price of Oracle's bonds maturing in 2033 with a 4.9% coupon has dipped, pushing yields up more than three basis points over the last two weeks, while the yield on its newer bonds maturing in 2032 with a 4.8% coupon has risen almost two basis points in one week, according to market participants.

Oracle did not immediately respond to a request for comment. 

'BUMP IN THE ROAD'

"There's definitely some selling pressure," said Stu Novick, tech sector credit analyst at corporate bond research firm Gimme Credit.

"The numbers are enormous (and) a lot of people are asking, 'how are they actually making money on this stuff?"

Tim Horan, chief investment officer for fixed income at Chilton Trust, said the Oracle bond selloff was unlikely to signal significant troubles for the company, which he said had mechanisms in place to address before cutting dividends.

“I’m viewing this more as a bump in the road … I don’t think what Oracle is experiencing is symptomatic of a popping of some kind of bond market expensive bubble," Horan said.

Other arguments have been made by well-known investors recently against investments in tech giants tapping into AI, such as Oracle, Microsoft and Alphabet-owned Google.

Michael Burry, the investor whose successful bets against the U.S. housing market in 2008 were recounted in the movie "The Big Short," and who is closing his hedge fund, Scion Asset Management, has argued that these companies are quietly stretching out depreciation schedules to make earnings look smoother as they commit money to AI development.

Between 2026 and 2028, those accounting choices could understate depreciation by about $176 billion, inflating reported profits across the sector, Burry estimated.

Michael Field, chief equity strategist for Morningstar in the Netherlands, noted that it is difficult to attach a depreciation number to the economic life of data centers.

"(But) it's decreasing all the time and it could be single, low single-digit years very shortly," Field said.

"It could be three to four years and then something's obsolete, (and) you have to make a hell of a lot of money in that particular time to pay off the infrastructure that went into that site in the first place."

(Reporting by Matt Tracy in Washington, D.C.; Editing by Alden Bentley, Richard Chang, Rod Nickel)