Oracle’s AI Debt Push Tests the Limits of Investment-Grade Credit

AUSTIN, Texas — Oracle Corp. has been labeled a “show me” story with “limited visibility” beyond 2027 as its artificial intelligence expansion places mounting pressure on its balance sheet. The company’s five-year credit default swap (CDS) spreads recently climbed past 200 basis points, matching risk premiums last seen during the 2008 global financial crisis. CDS are financial derivatives investors use to insure against a company defaulting on its debt.

S&P Global Ratings downgraded Oracle to BBB- on July 9, 2026, the lowest possible tier of investment-grade credit. The decision raised concerns among credit rating agencies and debt investors about the long-term profitability of the massive infrastructure spending supporting the AI boom. Tech giants are borrowing tens of billions of dollars to build AI data centers, while the timeline for those investments to generate positive cash flow remains highly uncertain.

Oracle has historically been known for its database software, but it has aggressively moved into cloud computing through its Oracle Cloud Infrastructure (OCI) division. The company is competing with dominant hyperscalers including Amazon Web Services, Microsoft Azure, and Alphabet’s Google Cloud. Its expansion also supports high-profile AI workloads, including partnerships to host systems for OpenAI.

The cost of that expansion has pushed Oracle’s fiscal year 2027 capital expenditure forecast sharply higher. After direct discussions with Oracle management, S&P increased its projection by nearly 60%, from an initial $60 billion to $95 billion. During a July 13, 2026, briefing titled “Oracle Downgrade Explained,” S&P analysts said they were routinely “playing catch up” as Oracle continued increasing its spending guidance.

In credit markets, investment-grade ratings range from AAA down to BBB-, while BB+ and below are considered speculative-grade, or “junk.” Ratings serve as benchmarks for borrowing costs, and a lower rating generally forces a company to pay higher interest rates to attract bond buyers. Debt investors focus primarily on the return of their principal, rather than the growth potential sought by equity investors.

S&P’s projections for fiscal years 2022 through 2028 call for Oracle’s revenue to rise approximately 239%. Over the same period, total debt is forecast to increase 412%, and interest costs are projected to jump 271%. The relationship between the projected debt and interest increases assumes Oracle will continue obtaining relatively favorable borrowing rates. If credit markets continue pricing in higher risk or interest rates remain elevated, the company’s actual interest burden could exceed current projections.

Oracle’s free cash flow—the cash left after operating expenses and capital expenditures are paid—is forecast to decline by 32% overall. It is expected to remain negative from fiscal year 2025 through fiscal year 2027, with S&P projecting that the company will not generate positive free cash flow again until fiscal year 2028.

The primary driver of Oracle’s rising debt is the cost of building and equipping advanced data centers with high-end artificial intelligence chips, including Nvidia’s graphics processing units (GPUs). S&P has characterized Oracle’s new cloud business as a “no moat business,” referring to the lack of sustainable competitive advantages that can protect profit margins over the long term. The agency still predicts strong accounting profits and revenue growth through 2028, but it warned of an “uncertain path to profitability” because of intense competition and the continuing cost of maintaining AI infrastructure.

During its explanatory call, S&P analysts acknowledged that Oracle’s current financial metrics do not align with traditional investment-grade standards. They described Oracle and Elon Musk’s SpaceX as “both no doubt outliers for investment-grade.” S&P nevertheless maintained Oracle’s investment-grade status because of the long-term structure of its enterprise contracts.

“What keeps it investment-grade is that we think that as the AI business scales, Oracle should be harvesting cash flow at years three, four, five of their contracts,” S&P stated. “So we are still giving the company time to prove their business case, and over that timeline we will have more data points, more confidence about Oracle’s AI business prospects.”

The broader debt market has been less willing to wait. A CDS spread above 200 basis points indicates that investors perceive significantly higher default risk than S&P’s BBB- rating would typically suggest. S&P’s stable outlook and BBB- rating depend on management’s commitment to preserving investment-grade status.

Oracle may need to pursue alternative financial strategies, including issuing new equity to pay down outstanding debt. S&P warned that further downward pressure could affect the credit rating if Oracle fails to stabilize or lower its debt-to-EBITDA ratio, or if it misses its target of returning to positive free cash flow by fiscal year 2028.