Bond, debt bond: Investors shaken, not stirred by Oracle’s borrowing spree sue Big Red

Datacenters don't come cheap. Oracle debt bond holders are suing the tech giant, because they say that the company didn't tell them it would need to borrow even more money after its original sale, making their purchases less valuable.

In September, Oracle raised $18 billion in debt bonds to help fund massive datacenter investments aimed at meeting surging demand from AI model builders and enterprise customers.

The Securities and Exchange Commission filings said Big Red sold the bonds to raise cash for a number of activities, including capital expenditures. The move followed Oracle's first-quarter results earlier in the month, when it stunned the stock market by announcing it had bagged cloud contracts, signed but not yet paid for, worth $455 billion. This reportedly included a $300 billion deal with OpenAI.

However, weeks later, media reports said Oracle planned to launch another $38 billion debt offering to fund data centers in Wisconsin and Texas that would support the Oracle–Open AI agreement.

In a filing which is yet to be reviewed by the county clerk, a class action lawsuit led by the Ohio Carpenters’ Pension Plan alleges that the initial $18 billion bond offering was accompanied by “false and misleading” documents which “omitted to state that, at the time of the Offering, Oracle would require a significant amount of additional debt to build the AI infrastructure ... which would ultimately bring the creditworthiness of these bonds into question.”

Oracle has declined the opportunity to comment.

The claim says that the bond market’s reaction to Oracle’s additional debt was “swift and bracing.” “Oracle’s Senior Notes began to trade with yields and spreads similar to lower-rated issuers as investors began to demand higher yields due to perceived credit risk,” the suit alleges. As a result, bond-holders bringing the class action suit “suffered significant losses and damages”.

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Others have acted on apparent concerns over Oracle's approach to debt. In November last year, financial traders piled into Oracle’s credit-default swaps, a financial instrument which offers insurance against a debt default. The price of Oracle CDS for five years tripled in the months leading up to November, an indication of a perceived increase in risk.

It is worth noting that Oracle retains around $20 billion in cash reserves and accrues around $57 billion in annual revenue. Few would anticipate it defaulting on its debts.

Oracle is in the middle of a multi-trillion-dollar race among tech giants to build the datacenters required to sate the expected appetite for AI models among businesses and consumers. Google owner Alphabet, for example, was set to triple capex between 2023 and 2025 to reach $93 billion.

Oracle is not the only company to dip into the debt market to fund its binge. In October, Facebook, WhatApp and Instagram owner Meta sold $30 billion in bonds to build out its infrastructure estate and support its ambition in AI markets. Some of these won't mature for 40 years. ®