Morgan Stanley sounds the alarm! Oracle Corporation's (ORCL.US) CDS costs approach a three-year high, AI speculation exacerbating debt risks.

Morgan Stanley said that a key risk indicator for the debt of database giant Oracle Corporation reached a three-year high in November, and unless the company can alleviate investor concerns about its large-scale artificial intelligence spending, the situation will only worsen by 2026. According to credit analysts Lindsay Taylor and David Hamburg, funding gaps, an expanding balance sheet, and risks of outdated technology are just some of the dangers Oracle Corporation currently faces. According to data from ICE Data Services, on Tuesday, the annual cost of default insurance for Oracle Corporation's debt in the next five years rose to 1.25 percentage points. In a report on Wednesday, they warned that concerns about the company borrowing heavily to fund its artificial intelligence ambitions continue to drive banks and investors to hedge significantly, with the risk that the price of their five-year credit default swaps (CDS) may break the record set in 2008. Analysts wrote that CDS prices could break 1.5 percentage points in the short term, and if communication about their financing strategy remains limited as the new year progresses, they might approach 2 percentage points. Data from ICE Data Services shows that Oracle Corporation CDS reached a historical high of 1.98 percentage points in 2008. A representative for Oracle Corporation declined to comment. Oracle Corporation is one of the companies competing in artificial intelligence spending, which has quickly made this data center giant a benchmark for measuring artificial intelligence risk in the credit market. The company raised $18 billion in the U.S. high-grade bond market in September. Subsequently, in early November, a consortium of about 20 banks arranged a project financing loan of about $18 billion for Oracle Corporation to build a data center park in New Mexico, which Oracle Corporation will take over as a tenant. According to reports last month, banks are also providing an additional $38 billion loan package to help fund data center construction being developed by Vantage Data Centers in Texas and Wisconsin. Morgan Stanley believes that banks involved in these construction loans related to Oracle Corporation are likely a major driver of the recent surge in Oracle Corporation CDS trading volume, a trend that may continue. Analysts wrote, "Over the past two months, the situation has become more apparent and those construction loans being prepared for Oracle Corporation as future tenants may be the most significant hedging driver in the near and future term." They wrote that there is a risk that when banks distribute these loans to other parties, some of the bank's hedge positions may be unwound. However, other parties may also hedge at some point, even at a later stage, and the funding needs for data center construction will not stop after the Vantage project and New Mexico project. Last month, these analysts said they expect recent deterioration in credit conditions and uncertainty to drive bondholders, lenders, and thematic investors to further hedge. They added, "The hedging dynamics of bondholders and thematic hedging dynamics may become more important in the future." In the context of increased hedging demand and weakening sentiment, the performance of Oracle Corporation CDS has lagged behind the broader investment-grade CDX index, while Oracle Corporation bonds have also performed worse than the Bloomberg High-Grade Bond Index. Concerns have also begun to weigh on Oracle Corporation's stock price, and analysts say this could prompt management to introduce a financing plan including details on the "Stargate" project, data centers, and capital spending in the upcoming earnings conference call. These analysts had previously advised investors to buy Oracle Corporation bonds and CDS through a strategy called "basis trading" to profit from their expected credit derivative spreads widening more than bonds. Now they say that directly buying CDS is a purer trading strategy. "Therefore, we are ending the 'buy bond' portion of the basis trade and retaining the 'buy CDS protection' portion," they wrote. "We believe trading CDS directly is now purer and will result in greater spread movements."