AI expansion ambitions! Oracle issues $18 billion in bonds, marking the second largest debt financing in the bond market this year.

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Oracle is undertaking large-scale borrowing to meet the massive capital expenditure demands brought about by the artificial intelligence boom.

On Wednesday, Oracle successfully completed an $18 billion investment-grade bond issuance, the second largest deal in the US bond market so far this year, with peak subscription demand approaching $88 billion.

This issuance comes at a time when Oracle needs huge funds to fulfill major cloud infrastructure contracts signed with tech giants such as OpenAI and Meta.

This massive financing will provide critical ammunition for Oracle’s AI infrastructure construction, but it will also push the company’s financial position to a new turning point.To support this expansion, the company’s cash flow this year turned negative for the first time since 1992, and its debt level will further climb.

This round of financing took place after Oracle announced the replacement of long-time CEO Safra Catz, raising market concerns about the company’s future financial discipline.

Funding Needs Driven by Ambitions in AI

In order to catch up in a cloud computing market dominated by Amazon, Microsoft, and Google, Oracle is investing in infrastructure construction at an unprecedented scale.

The company has signed significant cloud service agreements with customers such as OpenAI and Meta. Although these agreements offer broad prospects, they require Oracle to bear steep upfront construction costs. It is expected that in the coming years, the company will invest hundreds of billions of dollars in leasing and operating data centers.

Financial data shows that this aggressive expansion strategy has had a direct impact on the company’s finances.

Oracle’s cash flow turned negative this year for the first time in nearly thirty years. Analysts predict that this metric will continue to decline in the coming years, and is not expected to return to positive territory until 2029.

According to the issuance documents, proceeds from these bonds may be used for capital expenditures, future investments or acquisitions, as well as other general corporate purposes including debt repayment.

Investor Confidence and Debt Concerns

Despite the mounting debt burden, investors showed great enthusiasm for Oracle’s bond issuance.

The bonds were issued in six tranches, including a rare 40-year bond.

According to media reports citing people familiar with the matter, the final yield on the 40-year bond was set at 1.37 percentage points above comparable US Treasuries, down from an initial guidance of about 1.65 percentage points, indicating strong buyer demand.

Bloomberg Industry Research analyst Robert Schiffman said:

This is no longer a matter of ‘if we build it, they will come.’ The customers have already come, the contracts are in place, and the demand is real. All they need to do now is build the infrastructure. I think that’s why the credit markets have such confidence in them, and why they are able to borrow so much at fairly reasonable rates.

However, market optimism is mixed with concerns.

According to a securities filing, as of the end of August, Oracle held about $95 billion in long-term debt. Bloomberg Industry Research analysts believe that Wednesday’s deal will push up Oracle’s leverage ratio, but the company should be able to maintain its high credit rating.

Notably, the cost of five-year credit default swaps (CDS) used to hedge Oracle’s debt default risk jumped to its highest level since May 7 on Wednesday. Research firm CreditSights estimates that in support of its growth, Oracle may need to issue about $65 billion in debt by 2028.

Management Changes and Market Observation

Just before this large bond issuance, Oracle announced management changes, adding uncertainty to the company’s future strategy.

Long-serving CEO Safra Catz will be replaced, raising external doubts about whether her hallmark of strict cost control discipline can be maintained. Jefferies analyst Brent Thill wrote in a report:

There is uncertainty as to whether the strong cost control discipline seen under Safra Catz’s leadership will be disrupted.

The underwriters for this bond offering include Bank of America, Citigroup, Deutsche Bank, Goldman Sachs, HSBC Holdings, and JPMorgan.

In addition, Oracle’s massive bond deal also indirectly reflects the currently booming US investment-grade bond market.

Data compiled by Bloomberg shows that as of Wednesday, the total issuance of investment-grade corporate bonds this month has surpassed $190 billion, the highest level since February last year.

Amid rising expectations of Federal Reserve rate cuts, bond yields are falling, risk premiums are at historical lows, and numerous borrowers are seizing this favorable window to tap the market and lock in lower financing costs.

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