Oracle downgraded to BBB- as $95B AI capex strains credit profile

S&P Global downgraded Oracle Corp. to BBB-, the lowest investment-grade tier, citing AI infrastructure spending that surged to $95 billion and extreme customer concentration on OpenAI that leaves the company with no buffer before junk territory.

"Oracle's AI business is burning through far more cash than expected, and the revenue won't materialize for years," an S&P Global Ratings analyst said in the July 9 report. The agency maintained a stable outlook but identified OpenAI as a "key credit risk" for the company.

OpenAI accounts for roughly half of Oracle's $638 billion in remaining performance obligations, creating what S&P views as extreme customer concentration. Capital expenditure forecasts jumped to $90 billion to $95 billion by fiscal 2027 from a prior $60 billion estimate, widening the free cash flow deficit to negative $42 billion — nearly double the agency's earlier projection of negative $24 billion.

The downgrade leaves Oracle with no cushion before speculative-grade territory. A further cut would raise borrowing costs on $167 billion in total debt and force institutional investors restricted to investment-grade bonds to sell holdings. Oracle plans to raise $20 billion in additional equity in 2026 to preserve its credit profile, a significant shift for a company that historically relied on debt financing and share buybacks under Chairman Larry Ellison.

Why OpenAI Concentration Matters More for Oracle Than Its Rivals

Unlike Amazon Web Services, Google Cloud, and Microsoft Azure, Oracle lacks substantial internal AI workloads that could absorb excess data center capacity if a major customer defects. S&P noted that the three hyperscalers each run massive first-party AI operations that provide a natural hedge against customer churn. Oracle has no equivalent buffer.

"If OpenAI were unable to pay Oracle, we believe Oracle could be left with massive data center leases that it might be unable to exit," S&P said in its report. The risk is not purely hypothetical: OpenAI has postponed its planned initial public offering to 2027, and SoftBank recently reduced an OpenAI share-backed loan to $6 billion from $10 billion after lenders struggled to value the privately held company.

The Market Is Already Pricing in the Risk

Oracle shares fell 2.5 percent on July 10 to $140.64, extending a year-to-date decline of 28 percent. The stock has lost more than half its value from its 52-week high of $345.72 and now trades near its 52-week low of $134.57, giving the company a market capitalization of roughly $405 billion — below its $638 billion cloud backlog.

The $20 billion equity raise planned for later this year will test investor appetite for funding Oracle's AI bet. Management has signaled it expects to raise tens of billions more over the following three years, a dilution trajectory that contrasts sharply with the company's historical preference for buybacks. For bondholders, the key variable is whether Oracle can diversify its cloud customer base beyond OpenAI before the next ratings review. If it cannot, the path from BBB- to junk is one downgrade away.

This article is for informational purposes only and does not constitute investment advice.