TD Cowen says Nvidia is backing Oracle’s AI data centers

The cost of insuring Oracle's ↘ 1.53% debt against default has climbed to levels associated with junk-rated companies, even though the company is still rated investment grade. Credit investors are increasingly questioning how long it can keep borrowing to pay for its artificial intelligence buildout. Oracle's five-year credit default swap spread was 295 basis points as of Monday, October 19, after briefly reaching 300 the previous Thursday. That is up 287% from a year earlier, CNBC reported.finance.yahoo.com

Gavan Nolan of S&P Global Market Intelligence told CNBC that this range is "more in line with BB and B credit, which is high yield," and said spreads had "whipsawed" because of "fragile sentiment in AI-related names". On October 15, Reuters reported that Oracle's spread had widened 26 basis points overnight to a record 288, while CoreWeave's ↘ 0.50% spread passed 1,000.seekingalpha.com+1

One notch above junk

S&P cut Oracle to BBB- in July, the lowest investment-grade rating. The agency said a further downgrade could follow if it expects leverage to stay above 4x, if Oracle does not appear on track for positive free operating cash flow by fiscal 2029, or if it takes a negative view of AI strategy. According to FactSet data cited by CNBC, Oracle has issued $118 billion in long-term debt and has another $39 billion in capital and lease obligations. Analysts expect free cash flow of negative $23.7 billion this year and negative $36 billion in 2027.cnbc.com

Deutsche Bank's ↗ 1.74% Jim Reid called Oracle an AI "bellwether." He warned that a cut to junk "would risk pressuring IG-only investors into forced sales". Not everyone is alarmed. Vanguard's Brad Collins said balance sheets "are in a healthy starting spot." Oracle said that keeping an investment-grade rating "is our first priority as a company."cnbc.com

Nvidia's possible role

On Tuesday, October 20, TD Cowen analyst Michael Elias wrote that his firm's checks "indicate Nvidia is providing credit support to Oracle." He said that support could take the form of backstops, or of Nvidia ↗ 2.54% leasing capacity directly and subleasing it to Oracle. Elias said this partly explains Oracle's recent data center leasing in Southeast Asia, which supports a deal with Tencent. He added that Oracle is in active talks about vendor financing. Neither company has confirmed any such arrangement, and TD Cowen did not say how large it might be.tradingview.com+1

Oracle shares rose on Tuesday as investors weighed the possible financing support. The stock is still down 27% over six months. In its latest quarter, revenue rose 30% to $19.3 billion, but capital spending of $28 billion left free cash flow at negative $5 billion. Oracle expects full-year capex of $90 billion to $95 billion.finance.yahoo.com+1

"What Oracle really needs is … time," said Jamie Meyers of Laffer Tengler, which owns the stock. "They need to get these things built".cnbc.com