The cost of AI gambling: Oracle Corporation (ORCL.US) CDS cost doubled, paired with new tools to hedge against AI meltdown.

Notice that the once conservative database giant Oracle Corporation (ORCL.US) has now borrowed billions of dollars and intertwined its fate with the AI boom, rapidly becoming a barometer for the credit market to measure AI risks. In recent months, traders have been flocking to the company's credit default swap contracts. Oracle Corporation's massive spending in AI-related fields, its core role in a series of interconnected transactions, and its weaker credit rating compared to participants like Microsoft Corporation or Alphabet Inc., have made these contracts the preferred tool for hedging - even shorting - the booming AI market. According to data from ICE Data Services, the cost to protect against the company's debt default within the next five years has doubled in recent months, reaching a peak of 1.11 percentage points per year on Wednesday, requiring around $111,000 to protect $10 million in principal. Barclays PLC Sponsored ADR credit strategist Jigar Patel stated that with skeptics of AI entering the scene, the trading volume of the company's credit default swaps has surged to about $5 billion in the seven weeks ending November 14th. This is significantly higher than the slightly over $200 million in trading volume during the same period last year. "Just as we often see in the market, liquidity begets more liquidity, and once this wheel starts turning, it tends to keep going," said Matt Schrager, co-head of automated trading at TD Securities. Oracle Corporation's stock price also reflects growing investor concerns, having dropped by about a third from September 10th to Wednesday's close. It needs to be clear that hardly any views believe this company with a triple investment-grade rating and a market value of around $620 billion will default soon. Instead, the market view is that if investor confidence in AI wavers, Oracle Corporation's credit default swaps will further skyrocket, bringing substantial profits to investors who buy these derivatives and offsetting the losses they incur in broader market sell-offs. AI-related stocks gave back gains on Thursday, sparking widespread selling as the market became worried once again about the possibility of companies' revenues and profits not keeping up with the massive spending in AI. Oracle Corporation's stock briefly fell by 5%, while its bond prices remained relatively stable. The credit default swap price slightly decreased to around 1.09 percentage points. Oracle Corporation is among the companies with the highest investment in the AI field. It is a key participant in the "Stargate" project with OpenAI and SoftBank Group, which plans to rapidly invest $500 billion in building AI infrastructure. As part of this project, a consortium of about 20 banks will provide project financing loans of around $18 billion to build a data center campus in New Mexico, with Oracle Corporation as the lessee. The company also issued $18 billion in high-grade bonds in September, one of the largest corporate bond issuances in the US this year. Morgan Stanley analysts wrote last month that they expect Oracle Corporation's net adjusted debt to more than double from around $100 billion to about $290 billion by the 2028 fiscal year, and recommended investors to buy the company's five-year credit default swaps and bonds. JPMorgan strategists said that in the coming years, companies may issue about $1.5 trillion in high-grade bonds for AI-related investments. The bank also stated that other markets, including junk bonds and leveraged loans, will also be inundated with AI-related debts. Citadel Securities estimates that so-called mega-cap tech companies will issue around $100 billion in net high-grade bonds this year, with expectations that this number will be the lowest in the next year. "AI is the 'Manhattan Project' for mega-cap tech companies," wrote Citadel Securities credit analyst Jeff Eason in a recent report, "CEOs believe that the risk of failure is just as significant, if not greater, than the risk of overspending."