Barclays has downgraded Oracle's debt rating, flagging significant financial risks.
On November 11, Barclays' fixed income research team released a report highlighting that Oracle's capital expenditures to fulfill its massive AI contracts have far exceeded its free cash flow capacity, forcing heavy reliance on external financing.
The report projects that Oracle will face a severe funding gap starting in fiscal year 2027 (beginning June 2026), with cash reserves potentially depleted by November 2026.
Analyst Andrew Keches downgraded Oracle's debt rating to "Underweight," equivalent to a "sell" recommendation, and warned that the company could eventually slide to a BBB- rating—near junk bond territory.
Barclays noted that the hyperscaler industry is funding the AI race by issuing massive debt, straining credit markets. Oracle's situation is particularly dire, with a debt-to-equity ratio of 500%, compared to Amazon's 50%, Microsoft's 30%, and even lower figures for Meta and Google.
Earlier reports indicated that JPMorgan strategists also warned that the trillion-dollar capital demands of the AI boom could drain credit markets.
**Soaring Capex, Shrinking Cash Reserves**
The surge in capital expenditures stems from skyrocketing AI data center costs. Barclays cited industry data showing that building an AI data center can cost up to $50–60 billion per gigawatt—triple that of traditional facilities—with over half spent on Nvidia GPUs and other hardware.
Meanwhile, capex forecasts continue to rise. Since early 2025, industry projections for the coming years have nearly doubled.
Barclays estimates that announced U.S. AI data center projects alone will add over 45 gigawatts of power demand, requiring $2+ trillion in investment.
Free cash flow is no longer sufficient. While most hyperscalers (excluding Oracle) still generate solid cash flow, aggressive stock buybacks and dividends at firms like Google and Meta have reduced funds available for capex. Net free cash flow—after shareholder payouts—reveals a sharper funding gap, explaining recent mega-bond issuances by Meta, Google, and Oracle.
**Debt Issuance Floods the Market**
Barclays noted that while hyperscalers’ capex plans were no secret, top players historically relied on operational cash flow, rarely tapping bond markets at scale. This trend has reversed.
In recent months, major hyperscalers have issued $140 billion in bonds via public and private markets, with 2025’s total likely hitting $160 billion. Average deal sizes reached $25 billion, and even AA-rated Meta and Google saw widened spreads, signaling higher risk premiums.
Barclays expects this to persist as AI-driven capex grows. Though issuance may slow short-term, elevated debt sales will become the norm.
**Oracle: The Weakest Link**
Among hyperscalers, Oracle’s finances are the most precarious. It’s the only negative free-cash-flow player, with a 500% debt-to-equity ratio dwarfing Amazon’s 50% and Microsoft’s 30%.
Barclays’ stress test suggests Oracle’s cash could dry up by November 2026 even without further capex hikes. If spending aligns with market expectations (50% above consensus by FY2027), the gap would widen dramatically.
Off-balance-sheet lease commitments exceeding $100 billion add to leverage concerns. In contrast: - Meta has an $80 billion liquidity buffer despite funding needs. - Google maintains $70+ billion in liquidity, facing minimal near-term pressure. - Amazon and Microsoft remain net free-cash-flow positive even under extreme scenarios.
Barclays’ downgrade reflects Oracle’s looming credit-rating slide to BBB-. Firms at this level with persistent cash burns could see spreads align with high-risk peers (e.g., auto/cable sectors).
Keches warned that Oracle’s post-FY2027 funding needs may limit secondary bond performance. Its growth also hinges on vendor-financed deals with clients like OpenAI, amplifying counterparty risks. As partners hedge exposures, demand for Oracle’s credit default swaps (CDS) could rise—with its $300 billion OpenAI tie-up making CDS a proxy for OpenAI risk.
(Oracle’s 5-year CDS spreads have surged.)