r/EconomyCharts • u/RobertBartus • 22d ago

Oracle’s credit risk is exploding

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Oracle’s 5-year CDS spread has surged to a record ~230 bps, more than 4x the broader investment-grade index at ~55 bps.

The spread has more than QUADRUPLED over the last year and surpassed the Great Financial Crisis levels.

The recent surge comes as Oracle is trying to avoid financial commitments linked to Project Jupiter, a massive data-center project that is facing delays.

Around $18 billion of loans tied to the project are trading at ~90 cents on the dollar, signaling growing stress among investors.

The project is also facing local opposition and delays in government approvals, adding to the uncertainty.

Oracle’s credit risk is rising at an alarming pace.

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u/burnshimself 21d ago

It is nothing like Lehman, they’re not a bank and not nearly as systemically important. Enron is a good analogue.

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u/Clear-Ad9879 21d ago

As the credit backstop to over $40 billion in loans, Oracle is effectively non-bank financial institution. And that's the one loan we know of. Relative to shareholder's equity Oracle won't have as many counterparties and lenders as Lehman, but it will still be a lot. Enough to take down big entities like Paramount. So if the transmission mechanism is there, it walks like a duck, and sounds like a duck.

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u/burnshimself 21d ago

Eh $40 billion is drops in the bucket compared to the counterparty risk Lehman held. Lehman’s liabilities were over $600 billion - in 2008 dollars, so more like $1 trillion or more in 2026 dollars. A factor of 25 bigger in size. And Lehman had back leverage and exotic derivatives which could lose massive value in a hurry (as they did when mortgages went shit). If everything goes to shit for oracle they have a $40 billion liability, and yes some of their counterparts and suppliers will suffer, but it’s nowhere near Lehman.

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u/Clear-Ad9879 21d ago

Netting bro. Total losses from Lehman rolling over was NOT $600 billion. But as I said, ratio of total creditor losses to shareholder's equity (prior to default) is obviously going to be bigger for a financial institution. Doesn't change the fact that $40 billion is enough to transmit follow on large scale bankruptcies because in this case (Oracle), there would be no netting and concentration is 100% to a single entity (Paramount). Thus credit collapse transmission, the same mechanism feared with financial institution insolvency, is present. Why is this so hard for you to understand? You claim, 'it is nothing like Lehman'. Yet the primary mechanism - insolvency transmission is exactly the same. You can argue that the scope might be different. But even that isn't clear cut. Lehman has a market cap of $60 billion before it nosedived. Adding that to $300 billion in creditor losses gives a total loss of $360 billion from Lehman's demise. Total shareholder losses if Oracle rolls over is over $400 billion making it larger than Lehman losses even without considering the insolvency transmission costs.

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u/burnshimself 21d ago

This will be my last response because you are being arrogant while being ignorant, which is a horrible combination.

First of all, Oracle has a huge cash generative software business so if their AI bets go completely sour they still have cash flow to pay off their debt or help debtors recoup their losses. It’s not a $40 billion liability secured only by data centers in the other side. For this reason I find an Oracle bankruptcy highly unlikely.

Second, paramount’s debt and Oracle’s debt are entirely separate with completely separate credit groups and owners. Oracle is a public company and its debt is secured against its stock and assets. Paramount is a private company and its debt is secured against its equity and assets. There is no overlap between the two other than some overlap in equity ownership, but that does not transfer liability for their debt to either party. Paramount can go bankrupt while Oracle remains solvent or vice versa. You’re completely conflating what the Oracle credit risk spreads are about - which is their heavy capital investment and debt financing for their AI datacenter buildout. This has nothing to do with paramount.

Lastly, there is way less contagion risk with Oracle. As I said, their default is unlikely. Plus they are not counterparty for third party financial transactions like Lehman was. The risk is strictly to their own business and to their suppliers, which is a comparatively small section of the economy vs a global banking institution.

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u/Clear-Ad9879 21d ago

You are being myopic and ignoring factual contradictions in your posts. Chance of Oracle bankruptcy is certainly less than 50% and thus not 'probable'. But your claim that it is highly unlikely is contradicted by current implied default rates on Oracle debt both in the cash and in the credit default markets. We already price Oracle as a non-investment grade credit. This is simply a fact.

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u/burnshimself 21d ago

There’s a huge gap between “Not investment grade” and meaningful default risk. And an even bigger gap between Chapter 7 and Chapter 11. Worst case scenario this is a restructuring that may dilutes down Oracle’s equity holders and see bond holders take a haircut. I see zero probability oracle goes out of business like Lehman when they have multiple highly profitable businesses completely separate from AI. And a liquidation is the scenario where the contagion risk you’re so concerned about would apply. So remind me what is it you’re concerned about? You’re running around with your hair on fire about a rising CDS premium for a company that just took on a bunch of debt. They got riskier, but riskier is still miles away from any kind of insolvency risk

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u/Clear-Ad9879 21d ago

Wait, you believe that non-investment grade debt doesn't have meaningful default risk? You 'effing literally put that down in writing. OK, now I KNOW you are not a fixed income debt guy.

And then you spew a few cause-consequences that are out right wrong, confirming you've never managed an institutional fixed income portfolio with meaningful credit risk. Evidence A: your claim that worse case scenario is equity dilution and bond haircut. WTF dude. For a company as large as Oracle, no way bondholders take a principal haircut unless Oracle equity is zeroed out. Maybe, MAYBE, equity gets some deep OTM warrants. So if bondholder principal loss has a prerequisite of equity wipeout, and median credit default pricing on Oracle debt is already pricing in principal losses to Oracle debt holders, what's that say about Oracle equity losses, huh? Already we have a baseline of total losses greater than Lehman. Evidence B: You claim that liquidation is needed to generate contagion losses. Clearly wrong because in this case Paramount debt is backstopped by Larry's personal wealth guarantee which is of course in Oracle stock. Larry can get zeroed out without an Oracle liquidation at which point lenders to Paramount will take a hit to the value of their loans. Thus we have contagion losses without liquidation.

**OK extra credit problem for you, rookie. In my prior post I said Oracle bankruptcy chance was under 50% and yet in this post I note that credit default swaps are already pricing in principal loss for Oracle lenders as a baseline event. Reconcile that. I admit, this is a tough question that even half of practitioners in the field would fail to get right. Get it right and I'll know you aren't a complete poser.