A Hedge Against AI Crash Emerges as Oracle CDS Market Explodes

Core Viewpoint - Oracle Corp. is becoming a key indicator of AI-related credit market risks due to its significant investments in artificial intelligence and its weaker credit ratings compared to competitors like Microsoft and Alphabet [1][2]. Group 1: Credit Market Activity - Traders have increasingly engaged in Oracle's credit-default swaps (CDS) as a hedge against AI-related risks, with trading volume surging to approximately $5 billion over seven weeks ending November 14, compared to just over $200 million in the same period last year [2][4]. - The cost to insure against Oracle defaulting on its debt has tripled recently, reaching about 1.11 percentage points per year, equating to around $111,000 for every $10 million of principal protected [3][6]. Group 2: Stock Performance and Investor Sentiment - Oracle's stock has declined by about one-third from September 10 to the recent close, reflecting growing investor concerns about the company's future amidst the AI spending boom [5][7]. - Despite the decline in stock value, Oracle is not expected to default on its obligations soon, but a loss of investor confidence in AI could lead to a further increase in the value of its default swaps [6]. Group 3: AI Investments and Financial Strategy - Oracle is among the top spenders in AI, participating in the Stargate project, which aims to invest $500 billion in AI infrastructure, and is set to receive an $18 billion project finance loan for a data center in New Mexico [8][9]. - Analysts predict that Oracle's net adjusted debt will more than double to approximately $290 billion by fiscal year 2028, up from around $100 billion, and recommend purchasing its five-year CDS and bonds [9]. Group 4: Broader Market Implications - The market for AI-related investments is expected to see around $1.5 trillion in high-grade bonds issued in the coming years, with significant activity anticipated in junk bonds and leveraged loans as well [10]. - Citadel Securities analysts liken the AI investment race among hyperscalers to a "Manhattan Project," emphasizing the high stakes involved in securing leadership in AI technology [11].