S&P downgrades Oracle's credit rating to BBB- amid rising debt and AI investments

Credit Rating Downgrade

S&P Global has reduced Oracle's credit rating from BBB to BBB-, marking it just above junk status. This is significant as a further downgrade would categorize Oracle as a speculative investment, which could impact investor perception and borrowing costs.

Reasons for Downgrade

The primary reason cited for the downgrade is Oracle's substantial investments in expanding its AI data centers, leading to increased capital and debt requirements. S&P reported that Oracle's spending forecast for the fiscal year 2027 has risen to between $90 billion and $95 billion, up from the previously expected $60 billion. Rising costs of components such as GPUs and networking equipment were highlighted as contributing factors.

Financial Projections and Risks

S&P forecasts a nearly $42 billion deficit in free operating cash flow for Oracle in fiscal 2027. This financial shortfall is expected to be financed through a mix of debt and equity, raising concerns about the company's ability to maintain financial stability.

Dependence on OpenAI

S&P expressed particular concern over Oracle's strong reliance on OpenAI, which accounts for a significant portion of its expected service volume. A failure by OpenAI to meet its financial obligations could leave Oracle exposed to long-term leases on data centers that are not easily transferable to other customers. This dependency is considered a central credit risk in their analysis.

Transition to Cloud Infrastructure

Oracle is currently transforming into a larger cloud infrastructure service provider, with revenues from this segment projected to grow from 27% in fiscal year 2026 to nearly 60% by 2028. However, S&P ranks Oracle lower than competitors like Microsoft and Amazon due to its greater reliance on external customers.