Oracle just lost its last comfortable cushion of creditworthiness. S&P Global downgraded the database giant from BBB to BBB- on July 9 — the lowest rung of investment grade. One more notch down and Oracle’s bonds become speculative. The rating agency’s rationale is a damning portrait of a company betting its balance sheet on AI infrastructure, and losing.
🔍 THE BOTTOM LINE
Oracle is spending $95 billion in fiscal 2027 to build data centers for AI workloads it hasn’t fully secured — mostly for OpenAI, a customer that has never turned a profit. The company’s free cash flow deficit is projected at $42 billion. Its debt-to-equity ratio is 500%, the highest among major tech companies. S&P calls OpenAI a “central credit risk.” This is not a software company anymore. It’s a leveraged AI landlord hoping the tenant can pay rent.
What S&P Actually Said
The S&P downgrade, published July 9, cuts Oracle from BBB to BBB- with a stable outlook. The agency had flagged the risk a year earlier, setting the outlook to “negative” in July 2025. Now the other shoe has dropped.
According to Heise Online’s analysis, S&P’s core concern is Oracle’s rapidly growing AI infrastructure business, which is massively increasing debt and capital requirements. The rating agency forecasts a free operating cash flow deficit of nearly $42 billion for fiscal 2027. Oracle raised its spending forecast from $60 billion to $90-95 billion — S&P suspects rising GPU and network equipment costs are the driver.
The stable outlook means S&P doesn’t expect another cut in the next 12 months. But BBB- is the floor. Everything below is junk.
The OpenAI Problem
S&P identifies a single customer as Oracle’s biggest vulnerability: OpenAI. According to analyst estimates, roughly half of Oracle’s $638 billion in contractually promised but undelivered service volume is attributable to OpenAI. S&P explicitly describes OpenAI as a “central credit risk.”
The logic is brutal. If OpenAI cannot meet its payment obligations — and OpenAI has never been profitable, relying on continuous external fundraising — Oracle is left with long-term data center leases that cannot be easily terminated or transferred to other customers on comparable terms. Oracle’s ability to service its debt depends on OpenAI’s ability to keep raising capital at ever-higher valuations. S&P’s assessment is that this is “not considered certain.”
Oracle’s $300 billion partnership with OpenAI, first reported when OpenAI shifted compute from Microsoft to Oracle, is the largest single-customer concentration risk in the AI infrastructure sector. Barclays analyst Andrew Keches noted that Oracle’s credit default swaps can effectively be viewed as a proxy for OpenAI-related risk.
From Software Company to Hyperscaler
Oracle is mid-transformation. Cloud infrastructure accounted for about 27% of total revenue in fiscal 2026. S&P expects that share to rise to nearly 60% by 2028. But compared to Microsoft, Google, or Amazon, Oracle is in a weaker position: more dependent on external customers, less financially flexible, and facing new competition — including SpaceX, which is now renting computing capacity to Anthropic and Alphabet.
The company has already cut over 21,000 jobs in the past twelve months — about 13% of its workforce. The shift “from people to machines” is how Oracle aims to finance its AI infrastructure buildout. But cutting headcount to fund capex is a zero-sum trade that only works if the infrastructure generates revenue. So far, the revenue is promised but not delivered.
The Debt Mountain
Barclays, which downgraded Oracle’s debt to “underweight” back in November 2025, laid out the numbers that S&P has now confirmed. Oracle is the only hyperscaler with negative free cash flow. Its debt-to-equity ratio is 500% — compared to Amazon at 50%, Microsoft at 30%, and even lower for Meta and Google. Barclays forecast that Oracle’s cash reserves could be depleted by November 2026.
Oracle also has over $100 billion in off-balance-sheet lease commitments that will further pressure rating agencies. The company has issued massive bonds alongside other hyperscalers — a combined $140 billion in recent months — flooding the credit market and pushing spreads wider even for AA-rated issuers like Meta and Google.
The Bank for International Settlements has warned of parallels between debt-financed AI investments, the dot-com bubble, and the 2008 financial crisis. Oracle’s downgrade is exactly the kind of signal BIS was describing.
NZ Angle
For New Zealand, Oracle’s downgrade is a reminder that the AI infrastructure layer is not monolithic. NZ organisations contracting cloud services from Oracle — and several government agencies use Oracle databases — should be assessing counterparty risk. A BBB- rating means higher borrowing costs for Oracle, which eventually flow through to customer pricing. The broader lesson is that the AI buildout is being debt-financed, and that debt is starting to crack. NZ’s sovereign AI strategy, which emphasises renewable-powered local compute, looks more prescient by the day.
❓ FAQ
What does BBB- mean for Oracle? BBB- is the lowest investment-grade rating. Below that is BB+ and speculative territory — “junk.” Bonds drop in value, borrowing costs rise, and some institutional investors are forced to sell because their mandates prohibit holding junk-rated debt.
Could Oracle lose its investment-grade rating entirely? S&P’s stable outlook suggests no further downgrade in the next 12 months. But if Oracle’s spending exceeds forecasts, or if OpenAI’s financial position deteriorates, a junk rating is one notch away. Barclays predicted this scenario back in November 2025.
Why is OpenAI specifically a risk for Oracle? OpenAI accounts for roughly half of Oracle’s undelivered contract volume. OpenAI has never been profitable and relies on continuous external fundraising. If OpenAI cannot pay, Oracle is left with data centers it can’t easily repurpose.
How does this compare to other hyperscalers? Oracle’s debt-to-equity ratio is 500%. Amazon’s is 50%, Microsoft’s 30%. Oracle is the only major hyperscaler with negative free cash flow. It is financially the weakest player in the AI infrastructure race.
What does this mean for Oracle customers? Higher borrowing costs will eventually increase pricing. Cloud infrastructure contracts should be reviewed for termination clauses and portability. The risk is not immediate default, but gradual margin compression passed on to customers.
🔍 THE BOTTOM LINE
Oracle’s downgrade is the first concrete signal that the AI infrastructure arms race is producing casualties — not among the startups, but among the incumbents. A company with $50 billion in annual revenue and a 40-year history is one notch from junk because it bet its balance sheet on building data centers for a customer that has never made money. The AI boom is not just burning venture capital. It’s burning the credit ratings of the companies building the pipes. The next domino is not if, but when.
