Summary of ORCL's Data Center Financing Approach Company and Industry Overview - **Company**: Oracle Corporation (ORCL) - **Industry**: Data Center Financing and AI Computing Key Takeaways - **Credit Risk**: Current credit risks for ORCL are skewed to the downside, suggesting a recommendation for a 5-year basis trade [9][56] - **Financing Needs**: The demand for high-performance computing in AI data centers is driving significant financing needs, estimated at approximately $3 trillion through 2028 [12][14] - **Credit Quality Comparison**: While hyperscaler peers exhibit stronger credit quality and cash flow coverage, ORCL maintains an investment-grade (IG) balance sheet, allowing it to play a significant role in the Stargate project [11][21] - **Funding Sources**: ORCL has utilized public bond markets and construction loans to fund cash capital expenditures (capex) for data centers [11][31] - **Lease Liabilities**: The growing use of leases for data center shells is expected to impact ORCL's adjusted debt significantly, with an estimated $100 billion in incoming lease liabilities for Stargate data centers [11][38] Financial Insights - **Cash Flow and Capex**: ORCL has posted negative last twelve months (LTM) free cash flow (FCF) after dividends, which is expected to continue, leading to potential increased bond issuance and more complex financing vehicles [11][42] - **Chip Financing**: ORCL's cash capex is primarily directed towards revenue-generating equipment, with significant cash contributions required for new data center sites [42][45] - **Debt Projections**: Adjusted gross debt for ORCL is projected to grow to approximately $300 billion by the end of FY28, influenced by new leases and chip expenditures [46] Strategic Partnerships - **Stargate Partnership**: ORCL is taking a significant role in the Stargate partnership with OpenAI, which is expected to enhance its revenue potential from high-performance computing [27][30] - **OpenAI Contract Risks**: A substantial portion of ORCL's revenue potential is tied to its contract with OpenAI, raising concerns about counterparty and renewal risks [11][53] Construction and Financing Details - **Construction Loans**: The construction of Stargate data centers is being funded through substantial loans, with a reported $38 billion secured debt offering anticipated for two campuses [34][37] - **Lease Structures**: ORCL is leasing data center buildings from developers, with a significant portion of the costs covered through cash capex for equipment [31][32] Market Position and Future Outlook - **Market Dynamics**: The credit market is expected to play a critical role in meeting the financing needs of the data center industry, with ORCL positioned to leverage its IG status for favorable financing terms [12][19] - **Investment Strategy**: The recommendation to buy ORCL basis and short-dated bonds reflects the anticipated risks and uncertainties surrounding ORCL's financing needs and lease liabilities [56][60] Conclusion - ORCL is navigating a complex landscape of financing needs driven by the demand for AI data centers, with significant implications for its credit quality and cash flow management. The strategic partnerships and financing approaches will be crucial in determining its future market position and financial health.