Oracle (ORCL), AI Debt Insurance Reaches All-Time High...Junk Grade Warning

▲ Oracle (ORCL), Bear Market/AI Generated Image

The cost of Oracle's debt insurance has soared to an all-time high, and Asian semiconductor stocks have plummeted by double digits, raising a warning signal for the AI investment frenzy.

According to cryptocurrency specialized media CoinTelegraph on July 29 (local time), the prices of Credit Default Swaps (CDS) for Oracle (ORCL), SpaceX (SPCX), Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (META), Broadcom (AVGO), and Nvidia (NVDA) have recently risen to record highs. As massive funds for AI data centers and semiconductor facilities are financed through debt, investors' vigilance regarding credit risk has increased.

Oracle's rising credit risk was the most prominent. Oracle's 5-year CDS jumped from 144bp at the beginning of the year to 215bp. This means that to protect a $10 million debt from default, an annual payment of $215,000 is required. Oracle plans to invest $70 billion in data center expansion over the next year. S&P lowered Oracle's credit rating to BBB-, one notch above speculative grade, citing uncertainty in its revenue generation path.

John Aylward, Chief Investment Officer at Sona Asset Management, said, “The credit market does not tolerate uncertainty well,” adding, “The difficulty in predicting the speed and cost of AI financing is creating a serious crisis of confidence.” As large technology companies invest hundreds of billions of dollars in data centers and AI model development, there has been a strong movement in the bond market to ascertain the timing of investment recovery and free cash flow.

Credit market instability spread to the selling of Asian semiconductor stocks. The KOSPI fell more than 10% during intraday trading, and SK Hynix and Samsung Electronics dropped by up to 11.1% and 9.5%, respectively. In the US market, Nvidia fell by about 5%, while Micron Technology (MU) plunged 8.9% and AMD 8.1%. Semiconductor stocks were considered the biggest beneficiaries of expanded AI investment this year, but selling intensified as the burden of financing became prominent.

The rise of Chinese semiconductors and low-cost AI models also pressured investor sentiment. Chinese memory semiconductor company CXMT surged 466% on its first day of listing on the Shanghai stock exchange, raising $8.6 billion. News of mass production of Chinese deep ultraviolet (DUV) lithography equipment and improved performance of the open-source AI model Kimi K3 raised questions about whether massive capital expenditures (CAPEX) by US tech companies are still necessary. The performance evaluation criteria for AI companies are rapidly shifting from revenue growth to debt burden and the ability to recoup investments.

[Article Summary]

-The Credit Default Swap prices of major AI companies, including Oracle, have risen to record highs.

-Oracle's 5-year CDS jumped to 215bp, bringing the annual debt insurance cost for $10 million in debt to $215,000.

-AI financing instability and increased competitiveness of Chinese companies led to a sharp decline in Asian and US semiconductor stocks.

*Disclaimer: This article is for investment reference only, and we are not responsible for any investment losses based on it. The content should be interpreted for informational purposes only.*