Key points
- Oracle (ORCL) data-center loans are quoted below par
- Banks are struggling to sell the debt
- An early sign investors want a discount on AI debt
- The loans fund an OpenAI-linked campus
About $18 billion of loans that finance an Oracle (ORCL) data center in New Mexico are being quoted below face value. Banks quoted the loans at 89 to 91 cents on the dollar, the Financial Times reported on Friday. It is an early sign that investors are demanding a discount to hold AI-infrastructure debt.
The banks arranging the loans, among them Santander and Jefferies, have struggled to sell the debt on to other investors. That sale has stalled over concerns about Oracle's rising borrowing and its creditworthiness, the paper said.
What the debt is for
The loans fund a 1,400-acre data center campus in Dona Ana County, New Mexico, that Oracle has agreed to lease. The site, known as Project Jupiter, is part of Oracle's agreement to supply computing power to OpenAI under Stargate. Stargate is a $500 billion infrastructure plan led by OpenAI, SoftBank and Oracle. Local opposition to the campus, over its effect on water supply and air quality, has added to the doubts, the Financial Times said.
Why the discount matters
Oracle is borrowing heavily to build capacity it has already sold. In its most recent quarter the company reported a $664 billion order backlog and negative free cash flow, a mismatch between its contracted future revenue and the capital required to build the capacity. That backlog, across the AI buildout, sits on our backlog tracker, and whether the spending has outrun the returns is the question behind our AI bubble index.
The strain is not Oracle's alone. Neoclouds such as CoreWeave (CRWV) are funding their own buildouts with convertible notes and other borrowing. What is new here is that banks are quoting a major AI-infrastructure loan package at a discount. In the broader bond market, too, investors have grown choosier about AI debt, demanding wider spreads than they ask of traditional borrowers.
Oracle shares fell about 2% on Friday, closing near $147.60, the day the report appeared.
Oracle later sent a force majeure notice to the project's developer, Bloomberg reported.
A Federal Reserve president has since asked whether the AI ecosystem is becoming too big to fail, and who carries the risk.
Separately, Google's Mandiant said hackers renewed attacks on unpatched Oracle PeopleSoft systems.
Update, Sept. 28. Oracle's five-year credit default swap spread, the annual cost of insuring its debt against default, rose 16.2% in a week to a record 227.15 basis points on Thursday, Sept. 24. Spreads also widened for Google, Microsoft, Amazon, Meta, and Nvidia.
Investor Michael Burry, who has been betting against parts of the AI trade, said in a Sept. 28 Substack post that weekend research led him to reposition his portfolio. "Fundamentally, I am moving timelines up," he wrote. His reported trades are on our Michael Burry tracker.
We compared Oracle's borrowings, leases, and contracted revenue with CoreWeave's in a side-by-side look at the debt behind the AI buildout.
The pressure is spreading beyond these loans. Junk bonds are having their worst month since 2022 as Treasury yields climb. In November, about $500 million of data center loans went up for auction, including a $25 million slice backing the New Mexico site.
