JPMorgan downgrades Oracle — a glimpse into the bond market’s view on “AI infrastructure financing”
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A massive debt financing deal worth as much as $38 billion is poised to flood the market, providing ammunition for Oracle's data center projects.
This financing, led by JPMorgan Chase and Mitsubishi UFJ Financial Group, is not only the largest financing deal in the AI infrastructure sector to date, but also marks the shift of this race from a cash game played by tech giants to a leverage-driven capital gamble.
While the investment banking department is frantically arranging underwriting for this deal, JPMorgan's bond research team has released a "brake-tapping" research report, downgrading Oracle's credit rating from "overweight" to "neutral".
The report directly identifies three key credit risks behind its aggressive expansion:
- First, the $35 billion in massive capital expenditures conflicts with a vague financing strategy and an "unfriendly" credit history;
- Second, the $30 billion mega-deal with OpenAI creates customer concentration risk, and its cloud business's paltry 14% profit margin struggles to support high leverage;
- Third, a potential "capital circular flow" among AI giants could amplify a demand bubble.
Why has Oracle's AI ambition encountered a cold reaction from the credit market?
At the beginning of the report, JPMorgan’s bond team writes bluntly:
“We are downgrading Oracle’s rating, considering the company’s enormous capital requirements and limited visibility of its financing strategy.”
Wallstreetcn notes, this tech giant, known for its high-margin database software, is betting its future on becoming a capital-intensive AI cloud infrastructure provider. The direct cost of this transformation is an explosive rise in capital expenditures (Capex). The report points out that management has already raised FY26 Capex guidance to a staggering $35 billion—and that's just the tip of the iceberg.
For the credit market, massive investment is not scary in itself; what is worrying is the vague financial discipline and "troubled history" behind it. JPMorgan's bond team writes that Oracle has historically been “one of the least credit-friendly issuers in the investment-grade technology, media, and telecom sectors”.
For example, the company has long used debt financing for large-scale stock buybacks and aggressive acquisitions (such as the $28 billion acquisition of Cerner), resulting in ever-increasing leverage. Notably, prior to a recent management reshuffle, Oracle had gone ten years without a dedicated Chief Financial Officer (CFO)—extremely rare among large tech companies—and this also highlights its lax financial governance.
Further, JPMorgan's bond team analyzes that this historical performance makes Oracle's current AI expansion story a “show me story” in the eyes of credit investors—one that must be strictly verified.
In other words, the stock market can cheer for future $100 billion contracts, but the bond market needs to see real cash flows that can cover principal and interest. Unless and until Oracle demonstrates that its AI strategy can translate into sustainable profits and a healthy balance sheet, caution and skepticism in the credit market are likely to persist for a long time.
The Other Side of the Giant Contract: Is OpenAI "Sweet Honey" or "Poison"?
The fuse that ignited the Oracle stock frenzy was undoubtedly the five-year AI computing contract with OpenAI, worth as much as $30 billion. This mammoth order gave the market hope that Oracle could challenge Amazon AWS, Microsoft Azure, and Google Cloud in the AI infrastructure field.
However, within JPMorgan's bond analysis framework, this seemingly sweet contract comes with extremely high risks on the flip side.
First and foremost is“customer concentration risk”.
The report points out that tethering the company's short-term growth and asset utilization deeply to a single marquee customer inherently involves huge risks. Moreover, this customer—OpenAI—though a technical leader, still lacks a clear business model and path to profitability. Relying on a partner whose commercial prospects are uncertain for future revenues in the tens of billions is, for bond investors seeking stable returns, nothing short of a high-risk bet.
Second, and even more critical, are deep doubts about profitability.
The report cites a deep-dive by The Information, which, drawing on internal data, says Oracle’s cloud infrastructure (OCI) business has a “razor-thin” gross margin.
Data shows that in the three months ended August 31, Oracle earned about $900 million by leasing Nvidia-chip-driven servers, but its gross profit was only $125 million, for a gross margin of just 14%.
After accounting for labor, electricity, and equipment depreciation costs, the average profit margin is only about 16%—a world away from Oracle’s roughly 70% margin on traditional software, and “other unspecified depreciation” could reduce gross margin by another 7 percentage points.
Although Oracle management argued at a later investor day that gross margins for large AI infrastructure projects could reach 30–40%, this huge data gap exposes fundamental uncertainties in the profitability model of its AI business. Amid high GPU costs, rising energy prices, and an increasingly fierce cloud price war, whether Oracle can achieve promised profit levels becomes the key variable determining whether its massive debt can be safely repaid.
Loop Transactions: Systemic Risk in the Age of Leverage
As the entire AI infrastructure sector shifts from "cash is king" to a "debt race", JPMorgan’s bond team reveals a deeper, perhaps overlooked systemic risk—"circular counterparties".
The team notes in its report that the current AI infrastructure buildout seems to be occurring within a closed ecosystem of a few giants—a kind of "capital circular flow". The chain works roughly as follows: Nvidia provides GPUs to cloud provider CoreWeave and may extend credit to it; CoreWeave in turn provides computing to OpenAI; while OpenAI’s enormous model training expenditures are underwritten by Microsoft and Oracle’s cloud services.
Capital and business circulate within this small circle. Although each party gains genuine revenue from third-party customers, this high degree of interdependence blurs the line between strategic alliances and financial engineering.
The danger in this model is that demand may be “artificially amplified”; in a self-reinforcing loop, the enormous contracts between participants may mask the real demand from the broader real economy, thus creating a bubble.
And this is precisely what the credit rating agencies are concerned about. The report notes that alongside the JPMorgan bond team’s downgrade, two major global ratings agencies, S&P and Moody’s, have also revised Oracle’s ratings outlook to “negative” this summer.
S&P raised its leverage downgrade threshold for Oracle from 3.5x to 4.0x, acknowledging that AI investment requires “long-term vision”, but notes that “patience can’t last forever”. Moody’s, meanwhile, expects Oracle’s debt growth to outpace EBITDA growth, causing its leverage to remain above 4.0x in FY25.
These ratings alarms, together with the trillion-dollar funding gap mentioned earlier by Wallstreetcn, present a clear picture: the future of AI may be bright, but the road to that future is increasingly being paved with debt.
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