Oracle Corporation (ORCL.US) "Force Majeure" Notice Shakes the AI Bond Market! Morgan Stanley: Data Center Financing Contracts Face Re-examination

Morgan Stanley said that Oracle Corporation (ORCL.US) has issued a "force majeure" notice to the developer of a large data center in New Mexico, prompting investors to re-examine loan and lease contract terms in AI data center financing and adding new uncertainty to an AI infrastructure debt financing market already facing multiple pressures. Morgan Stanley analysts Lindsay Tyler, Vishwas Patkar and others said in a report released on Friday: "We expect projects that still have substantial construction or completion risk, as well as transactions backed by tenants with weaker credit quality, to be most sensitive to this event. Conversely, assets nearing stable operations or with limited construction risk exposure should be relatively less affected." Currently, companies hoping to raise billions of dollars through debt markets to build AI infrastructure are already facing challenges such as rising borrowing costs, increased bond supply suppressing risk premiums, and growing opposition to data center projects in many parts of the United States. Morgan Stanley believes that Oracle Corporation's attempt to avoid bearing related costs in the event of delays at the New Mexico project adds contract-level uncertainty to this already stressed market. The force majeure notice issued by Oracle Corporation quickly spread to credit markets on Thursday, with data center-related bond spreads widening sharply, while the cost of five-year default protection for Oracle Corporation debt also surged to a record high. The reason this event has attracted intense attention from bond investors is that a large amount of data center construction financing had previously relied heavily on long-term leases signed with high-credit-rating tenants as important support. For creditors, the stable cash flow provided by such long-term lease contracts is one of the important bases for assessing the debt-servicing capacity of data center projects. Therefore, when a hyperscale cloud computing company like Oracle Corporation attempts to invoke force majeure clauses to reduce the potential costs of project delays, investors have begun to scrutinize more carefully how much contractual protection the relevant financing agreements can actually provide. Morgan Stanley pointed out that a key question now is whether the Oracle Corporation incident is merely a special contractual dispute involving a single project, or whether it could set a precedent prompting other data center tenants to take similar action. The analysts said: "If another high-credit-quality hyperscale cloud computing company takes similar action, its significance to the market could be even greater and could prompt investors to more broadly reassess contractual protection mechanisms." More noteworthy is that Oracle Corporation took this action while the data center was still some time away from its scheduled delivery. Morgan Stanley believes that Oracle Corporation "taking this step very early before the scheduled delivery date means the situation has escalated," raising a new question: whether this means Oracle Corporation will take a tougher stance on data center lease commitments in the future, and whether, if its own customer demand comes under pressure, this attitude could extend further to computing power contracts. This event also exposes another problem in the AI infrastructure financing market, namely that investors still have limited understanding of the underlying contracts supporting the AI construction boom. Because a considerable portion of AI data center construction is completed through bank loans and private financing, the related leases, computing power procurement and other contracts are not as transparent as information in the public bond market. Morgan Stanley believes that this "limited visibility" increases the difficulty for investors in judging the actual risks of related projects. The Oracle Corporation incident comes as the massive funding needed for AI infrastructure construction is increasingly relying on debt markets. As technology companies, data center operators and infrastructure developers invest heavily in building server clusters, power facilities and related infrastructure, market financing demand is rising rapidly. But at the same time, rising borrowing costs and a large volume of bond issuance are putting pressure on credit markets. Against this backdrop, investors not only need to assess the construction and operational risks of data centers themselves, but are also paying increasing attention to whether the long-term leases that serve as the core support of projects are sufficiently solid. Especially for projects still in the construction phase, if major tenants can use contractual clauses to reduce the delay costs they bear, then future cash flows previously considered relatively stable may face greater uncertainty, thereby affecting the risk pricing of related project debt. Therefore, Morgan Stanley believes that data center projects with earlier construction schedules, higher completion risk and relatively weaker tenant credit quality may be most vulnerable to this event, while projects already nearing completion or entering stable operations are relatively more defensive. Although this force majeure notice has triggered market concerns, Morgan Stanley does not believe that Oracle Corporation's move means the company is trying to evade its own debt repayment obligations. However, the bank remains cautious about Oracle Corporation's credit condition, mainly due to the company's cash burn, relatively high adjusted leverage, and persistent credit rating risks.