The cost of AI gambling: Oracle's (ORCL.US)CDS costs have tripled, becoming a new tool to hedge against the AI collapse

Zhitong Finance has noted that Oracle (ORCL.US), a once-conservative database giant, has now borrowed tens of billions of dollars and closely linked its fate to the artificial intelligence boom, and is rapidly becoming the benchmark for the credit market to measure artificial intelligence risks.
Traders have flocked to the company's credit default swaps in recent months. Oracle's huge spending in AI-related areas, its central role in a series of interconnected transactions, and its weaker credit rating compared to participants such as Microsoft Corp. or Alphabet Corp. have made these contracts a market hedge-or even short-the tool of choice for the artificial intelligence boom.
The cost of preventing the company from defaulting on its debt within five years has tripled in recent months, peaking at an annual rate of 1.11 percentage points on Wednesday, or about $111,000 for every $10 million of principal protected, according to ICE Data Services.
Jigar Patel, credit strategist at Barclays Bank, said the company's credit default swaps trading volume has soared to about $5 billion in the seven weeks ended November 14 as artificial intelligence skeptics poured in. This compares with just over $200 million in the same period last year.
"As we often see in markets, liquidity creates more liquidity, and once the flywheel starts turning, it tends to continue," said Matt Schrager, co-head of automated trading at TD Securities.
Oracle's share price also reflects growing investor concerns, with its market value shrinking by about one-third from September 10 to Wednesday's close.
To be clear, there is little view that the company with a triple investment-grade rating and a market capitalization of approximately $620 billion will default soon. Instead, the market view is that if investors 'confidence in artificial intelligence wavers, Oracle's credit default swaps will soar further, bringing substantial profits to investors who buy the derivative and offsetting losses they have suffered in the broader market sell-off.
Artificial intelligence-related stocks retracted early gains on Thursday, triggering widespread sell-off amid renewed concerns that corporate revenue and profits may not be able to keep pace with huge spending related to the technology. Oracle shares fell 5%, while its bond prices remained largely stable. Its credit default swap price fell slightly to about 1.09 percentage points.
Oracle is one of the companies with the largest investments in artificial intelligence. Together with OpenAI and SoftBank Group, it is an important participant in the "Stargate" project, which plans to quickly invest US$500 billion to build artificial intelligence infrastructure.
As part of the plan, a consortium of about 20 banks will provide approximately $18 billion in project financing loans to build a data center campus in New Mexico, which Oracle will take over as a lessee.
The company also separately issued $18 billion in high-grade bonds in September, one of the largest corporate bond issues in the United States this year.
Morgan Stanley analysts wrote last month that they expected Oracle's net adjusted debt to more than double from about $100 billion to about $290 billion by fiscal 2028, and advised investors to buy the company's five-year credit default swaps and five-year bonds.
JPMorgan strategists said companies may sell about $1.5 trillion in high-grade bonds for artificial intelligence-related investments in the next few years. The bank said other markets, including junk bonds and leveraged loans, will also be flooded with AI-related debt.
Citadel Securities estimates that so-called hyperscale computing companies will net sales of about $100 billion in high-grade bonds this year, and expects that figure to be the lowest level next year.
"Artificial intelligence is the 'Manhattan Project' of hyperscale computing companies,"Citadel Securities credit analyst Jeff Eason and others wrote in a recent report."CEOs believe that the risk of failure is as significant as, or greater, the risk of overspending. "