Oracle's $14bn AI data centre bond faces pushback as investors demand higher yields amid debt worries

Investors push for higher yield on $14bn of Oracle-backed data centre debt

Investors are demanding a higher-than-usual premium to back a $14bn bond offering by an Oracle-backed data centre project, amid growing concerns over the huge amounts of AI-related debt coming on to the market. The sale, which has been privately pitched to a small group of institutions in recent weeks, is to fund a 1 gigawatt data centre in Saline Township, Michigan, as part of a $300bn agreement with OpenAI to provide the ChatGPT maker with 4.5GW of computing power, say people familiar with the matter. However, some investors have questioned whether Oracle -- whose aggressive AI spending plans have been a source of market worry in recent months -- could provide sufficient guarantees to ensure debt repayment if the project were delayed or if Oracle ever exited the lease backing the project bond. The tech giant is only a tenant, rather than a joint owner of the facility. To compensate for these risks, some investors had demanded yields of more than one percentage point over Oracle's publicly traded corporate bonds due in 2040, the people said, and more credit protections, including the removal of a proposed option that would allow the issuer to buy back the debt early. Few, however, expect this ultimately to scupper the deal as the order book is still well covered. "It's still project finance ultimately," one of the people said. "You're still going to take construction risks." Big Tech companies have borrowed more than $100bn in global bond markets so far this year to help fund the AI arms race, fuelling investor concerns that the runaway capital expenditure might not translate into actual profits and may be a bubble that could hit the broader economy. The Oracle-backed data centre is being built by developer Related Digital, and the debt is being issued by a special purpose vehicle. Investors say that raising debt off Oracle's balance sheet helps alleviate their concerns over the rising debt load at the company, which raised $25bn from the bond market in February after it pledged to preserve its investment-grade credit rating. However, if the deal went ahead, it it could open up a new wave of financing for similar project-level bonds without equity stakes from big tech companies, said Gianluca Bacchiocchi, a partner at Clifford Chance specialising in financing energy and infrastructure projects. The sale was being led by Bank of America and was expected to launch in the so-called 144A market in the coming weeks, allowing thousands of institutional investors to trade the bond, the people said, adding that final pricing and terms were still subject to negotiation. Some investors who had been approached privately were hoping to secure the debt early on and resell a portion of it for a quick profit when the deal launched to the wider group of investors, the people said. "This is a new asset class that only emerged in recent months. There is no quant model for us to calculate what is a good relative value for a deal," said Katie DeSplinter, head of US credit trading at Capital Group, speaking about such deals in general. Pimco was expected to be an anchor investor of the bond sale, while Blackstone would provide about $2bn of equity in addition to the debt, the people added. Blue Owl Capital also considered backing the project but did not proceed as negotiations stalled, the FT previously reported. Bank of America, Related Digital, Blackstone and Pimco declined to comment. Oracle did not respond to requests for comment. Unlike traditional project loans that need to be refinanced within four to six years, a project bond can provide financing with longer maturities to minimise refinancing risks. While banks used to provide the bulk of financing for data centre build-outs, large-scale projects are increasingly turning to other types of debt investors as the massive deal sizes overwhelmed the bank market. "There's more caution among banks," said Bacchiocchi. "Some are reviewing whether they need to reduce or hedge some of their positions." Additional reporting by Eric Platt and Kate Duguid in New York

Why Oracle's AI Spending Spree Has Wall Street On Edge - Oracle (NYSE:ORCL)

Debt Limits Challenge Data-Center Financing The report said Oracle's $300 billion megadeal with OpenAI is pushing Wall Street to its limits, straining investor appetite for the massive debt fueling America's data-center boom. Analysts Warn Of Large Funding Needs Morgan Stanley credit analysts told the WSJ that Oracle still faces more than $100 billion in additional funding needs through 2027 and early 2028, after planning to raise about $50 billion for 2026. They cautioned that these requirements could "test the depths of different fixed-income markets," underscoring the scale of financing needed for AI infrastructure. Market Risks And Investor Concerns Grow Lenders have grown cautious due to Oracle's weaker financial profile compared with peers, including higher debt and cash burn, as well as its reliance on OpenAI, which adds uncertainty. Despite Oracle stating that projects are progressing on schedule and funding sources are diversified, the broader market faces pressure as AI spending outpaces available capital, with big tech expected to fund only about half of the projected $3 trillion investment through 2028, according to Morgan Stanley. Execution Remains The Key Risk He noted Oracle often serves as an overflow provider but remains much closer to these leaders than smaller cloud players, supported by its software cash flows and an estimated $550 billion backlog that signals strong demand visibility. However, Luria warned that execution will be critical as Oracle scales its infrastructure. While earlier concerns about AI demand have eased -- supported by large funding commitments like OpenAI's $122 billion raise and ongoing compute shortages -- he said the company's ability to deliver on this opportunity remains the key risk. ORCL Price Action: Oracle shares were up 1.52% at $178.96 during premarket trading on Friday, according to Benzinga Pro data. Photo via Shutterstock Market News and Data brought to you by Benzinga APIs To add Benzinga News as your preferred source on Google, click here.