S&P's downgrade leaves Oracle financing OpenAI's bet years before it pays off
Oracle's bonds now trade like junk debt, and the company won't see a dollar of OpenAI's money until 2027. That gap is the whole story.
S&P Global Ratings cut Oracle's credit rating to BBB-, one notch above speculative grade, pointing directly at the scale of the company's AI spending and the fact that OpenAI, its single largest customer, doesn't start paying under its contract until 2027. Oracle's total debt has climbed toward $167 billion, and S&P now expects the company's free cash flow deficit to widen to nearly $42 billion in fiscal 2027, far worse than the agency's earlier forecast of negative $24 billion.
The market reaction has been brutal and, lately, sustained. Oracle shares fell another 7% on October 17 after investors questioned whether the company can hit its own target of $166 billion in cloud infrastructure revenue by 2030, up from $18 billion in fiscal 2026. The stock is down roughly a third this year. Credit-default swaps on Oracle's debt spiked to around 203 basis points, a level Newsquawk and Seeking Alpha both reported as the highest since the 2008 financial crisis, higher than it's ever traded before, including during the pandemic.
Here's the arithmetic that's spooking bondholders. Oracle guided fiscal 2027 capital expenditure to $90 billion to $95 billion, far above what S&P had modeled just months earlier. The company is borrowing and building now, at that pace, against a backlog it won't start collecting on for more than a year.
Oracle ended fiscal 2026 with $638 billion in remaining performance obligations, up 363% year over year. OpenAI accounts for roughly half of that number. In July, OpenAI signed a five-year cloud contract with Oracle reportedly worth $300 billion, described at the time as the largest deal in corporate history, covering 4.5 gigawatts of computing capacity, about what 4 million American households use in electricity.
Oracle posted record Q4 revenues of $19.2 billion and full-year revenues of $67.4 billion, yet shares fell over 7% after hours as annual capex hit $55.7 billion and the company announced plans to raise another $40 billion in fiscal 2027. The company's cloud infrastructure business, fueled by contracts with OpenAI, Meta, Nvidia, xAI, AMD, and... - oracle stock fell despite record earnings and revenue - why oracle plans massive capital expenditure and financing
That contract doesn't start generating revenue for Oracle until 2027, when OpenAI is slated to begin paying roughly $60 billion a year. S&P Global flagged OpenAI explicitly as a "key credit risk" to Oracle, a blunt way of saying the rating agency isn't convinced OpenAI, itself not yet profitable and burning cash on its own model training, will reliably make $60 billion in annual payments starting on schedule.
Oracle's leadership isn't hedging on this. Clay Magouyrk, the company's co-CEO, told the audience at Oracle's AI World conference in Las Vegas that OpenAI can "of course" cover its payments, citing ChatGPT's 800 million weekly active users as evidence of OpenAI's own growth. That's a confident answer. It isn't a guarantee, and it isn't backed by anything OpenAI has disclosed about its own balance sheet.
Barclays analyst Andrew Keches downgraded Oracle's debt around the same period, citing what he called the company's "significant funding needs" and no clear path to rebuilding its credit profile. Barclays went further, telling clients to buy five-year credit-default swaps on Oracle as a hedge, a research desk effectively recommending clients bet against the company's own debt while still holding the stock.
Oracle isn't short on avenues to raise cash. It pulled in $18 billion in a September bond sale and is reportedly in talks for another $38 billion to $40 billion in debt and equity, aimed at funding data centers in Texas and Wisconsin. Not all the capex burden sits on Oracle alone, either. Of the $638 billion backlog, $75 billion is customer-prepaid GPU purchases, meaning some clients are funding the buildout directly rather than waiting on Oracle to front it.
Moody's also has Oracle on negative outlook, a real shift for a company investment-grade just two years ago.
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The Financial Times says OpenAI's annualized revenue sits near $50 billion, not the $70 billion Axios reported weeks earlier. Oracle and AMD shares fell after the revision became public on October 8. - openai revenue accounting discrepancy explained - why openai revised financial guidance lower
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