Oracle default insurance costs hit record on AI debt fears

The cost of insuring Oracle's ↗ 3.00% debt against default has reached an all-time high. Its five-year credit default swap spread hit a record 288 basis points, up 26 basis points overnight, according to S&P Global Market Intelligence data cited by Reuters. In an updated version, Reuters said the spread was quoted at 288 on Thursday, October 15, unchanged from the previous close but up from 260 a week earlier.finance.yahoo.com+1

The jump shows how worry about debt is spreading through the artificial intelligence trade. Investors are asking whether heavily indebted companies can earn returns on data center spending fast enough to cover rising interest costs. Hotter-than-expected US inflation data and expectations of higher interest rates have added to the pressure.reuters.com

CoreWeave at the center

CoreWeave ↗ 5.94%, a loss-making data center operator, has seen its credit default swaps blow out past 1,000 basis points, according to LSEG data. That level implies a roughly 63% chance of default over five years, up from about 30% a year ago. The company owes nearly $50 billion, and its 2032 bonds traded at around 78 cents on the dollar, a yield of just over 16%. The swaps had topped 600 basis points on Wednesday before climbing past 1,000 early Thursday.rmb.reuters.com+2

The stock fell 15% on Wednesday and another 6% after hours, wiping out about a fifth of its value. Oracle shares fell 10% the same day, as some investors used the credit default swaps of the most leveraged AI companies to hedge their exposure to the sector.reuters.com+1

"CoreWeave is quickly becoming the AI trade's canary in the coal mine," said Kathleen Brooks, research director at XTB.businessday.co.za

Stress spreads to megacaps

SoftBank's five-year spreads widened 24 basis points to 424. Default swaps for Amazon Amazon.com, Inc. ↗ 0.27%, Alphabet ↗ 0.37%, Meta ↘ 0.11% and Nvidia ↘ 1.84% also hit record wide levels, though at much smaller spreads than Oracle's. Oracle's spread is well above those of other AI-linked companies. None of the companies has defaulted or signaled that it might.reuters.com+1

Oracle's five-year credit default swap spread is now about 3.7 times its level of a year ago. It passed its earlier record in late September, and its 2066 bond traded at its widest spread since being issued in February. Banks are also still working to sell off the last of a $38 billion loan tied to Oracle-linked data centers.startupfortune.com+1

Oracle's finances are not in the same state as CoreWeave's. Still, rising insurance costs suggest credit investors are growing more cautious across the sector, and further widening could point to a broader rethink of AI infrastructure investment.finance.yahoo.com