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Credit stress is closing in on the artificial intelligence trade, with Oracle emerging as a crucial test for investors who once treated AI spending as an almost unquestioned growth engine. Much of the trade fizzled last week, led by CoreWeave as the neocloud company’s equity and debt sank.

CoreWeave and Oracle occupy different corners of the credit market. CoreWeave is already in junk territory, while Oracle remains investment grade, a distinction that has kept some analysts and fixed income investors from sounding a broader alarm.

Even so, Oracle faces the risk of further credit rating downgrades that could push its debt into junk territory. Such a move could create cascading pressure across the wider AI financing ecosystem.

Pat Nerney, head of investment solutions at Dynasty Financial Partners, described a sharp swing in market psychology. “There seems to be a sentiment shift, which almost speaks to 2026 in general, where we’re so bullish about everything and then we’re so bearish about everything,” he said.

That change is visible in the cost of insuring against an Oracle default. The spread on Oracle’s five year credit default swaps stands at 295 basis points after briefly touching 300 basis points on Thursday, an increase of 287% in one year.

Gavan Nolan, executive director of fixed income pricing at S&P Global Market Intelligence, said that range is more consistent with BB and B credit, both considered high yield. Wider credit default swap spreads signal that investors view a borrower’s debt as riskier.

Nolan said Oracle’s swaps benefit from strong liquidity, but their recent volatility reflects fragile sentiment around AI related companies. He pointed particularly to high yield issuers and companies near the weaker end of the investment grade spectrum.

S&P rates Oracle BBB-, the lowest level within investment grade. The agency downgraded the company in July, citing the additional credit risk created by Oracle’s rapidly expanding infrastructure business and expectations for weaker operating cash flow in 2027.

Oracle remains primarily an enterprise software company, but it is charging into data centers and cloud services. That expansion includes a massive $300 billion agreement with OpenAI.

Funding that buildout has placed a substantial burden on Oracle’s balance sheet. According to FactSet data, the company has issued $118 billion in long term debt and carries another $39 billion in capital and lease obligations.

The company is spending heavily while waiting for AI revenue to surge. Consensus forecasts cited by the source estimate negative free cash flow of $23.7 billion this year and negative $36 billion in 2027.

Jim Reid, global head of macro and thematic research at Deutsche Bank, called Oracle an AI bellwether. He said a downgrade into junk territory could pressure investors restricted to investment grade holdings into forced sales.

S&P said another downgrade could follow if Oracle is expected to sustain leverage above 4x. Other possible triggers include doubts that Oracle is moving toward positive free operating cash flow by fiscal 2029, or a negative assessment of Oracle’s AI strategy or the broader AI industry.

Investment grade status currently allows Oracle to borrow more cheaply and over longer periods. Jamie Meyers, a senior securities analyst at Laffer Tengler, said a junk rating would probably raise Oracle’s borrowing costs and force the company toward shorter maturities.

“Nobody in high yield is going to buy a 30 year debt,” Meyers said. Still, he remains unconcerned about Oracle’s debt levels and said the company stressed during a meeting with Laffer Tengler last year that it would defend its investment grade rating.

Meyers expects Oracle’s revenue and earnings to begin rising as projects are completed. Brad Collins, a fixed income portfolio manager at Vanguard, also expressed confidence in Oracle and other hyperscalers, citing healthy starting balance sheets and Oracle’s diligence with debt issuance.

Nerney described Oracle’s situation as a financing test that the company will either pass or fail, with another downgrade among the possible consequences. He said rising rates could make Oracle debt less attractive relative to other opportunities, prompting investors to demand more.

Oracle said maintaining its investment grade rating is its first priority as a company. The company added, “The AI infrastructure business has strong economic returns and we expect it will produce strong free cash flows once projects are ramped.”

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.