Moody's Corporation warns of a $300 billion AI deal risk for Oracle Corporation (ORCL.US) and maintains its Baa2 rating unchanged.

Credit rating agency Moody's Corporation pointed out several hidden risks in the approximately $300 billion AI contract signed by Oracle Corporation (ORCL.US), but did not take any rating action on this software giant (i.e. neither downgraded the rating nor adjusted the outlook). Oracle Corporation announced this month that the contract value for its cloud infrastructure business is expected to exceed $500 billion, and the Wall Street Journal subsequently reported, citing sources familiar with the matter, that OpenAI has signed a five-year, $300 billion total computing power procurement contract, which is a major part of Oracle Corporation's $500 billion contract value. Moody's Corporation analysts mentioned in their report on Wednesday that the $300 billion contract did not specify the specific client but emphasized the "huge potential" it highlights for Oracle Corporation's AI infrastructure business. However, the analysts also reiterated the risks outlined when Oracle Corporation's rating outlook was downgraded from "stable" to "negative" in July: Oracle Corporation's business model is highly dependent on large commitments from a few AI companies, posing significant "counterparty risk" - a key risk in project financing, especially when revenue is highly dependent on a single customer. Moody's Corporation pointed out that Oracle Corporation's data center construction is essentially one of the largest project financings in the world, with debt growth outpacing EBITDA growth. It is expected that the net leverage ratio (net debt/EBITDA) will need to rise to 4 times before achieving EBITDA coverage for debt, and before reaching breakeven, free cash flow is likely to remain negative. Currently, Oracle Corporation's Moody's Corporation issuer rating is Baa2, which is at the lower end of investment-grade credit ratings.