Morgan Stanley has stated that Oracle's (ORCL.US) issuance of a "force majeure" notice to the developer of a large data center in New Mexico is prompting investors to re-examine loan and lease contract terms in AI data center financing, adding fresh uncertainty to an AI infrastructure debt financing market already under multiple pressures, according to Zhitong Finance APP.
Morgan Stanley analysts Lindsay Tyler, Vishwas Patkar and others said in a report released on Friday: "We expect that projects still carrying significant construction or completion risk, as well as transactions backed by tenants with weaker credit quality, will be most sensitive to this event. Conversely, assets approaching 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 rising borrowing costs, increased bond supply compressing risk premiums, and growing opposition to data center projects in many parts of the United States.
Morgan Stanley believes that Oracle's attempt to avoid bearing related costs in the event of delays at the New Mexico project has added contractual uncertainty to this already stressed market.
Oracle's force majeure notice quickly rippled through credit markets on Thursday, with data center-related bond spreads widening significantly, while the cost of five-year default protection for Oracle's debt surged to a record high.
The reason this event has drawn intense attention from bond investors is that a large portion of data center construction financing has previously relied heavily on long-term leases signed with high-credit-rating tenants as important support.
For creditors, the stable cash flows provided by such long-term lease contracts are one of the important bases for assessing the debt-servicing capacity of data center projects.
Therefore, when a hyperscale cloud computing company like Oracle attempts to invoke force majeure clauses to reduce potential costs from project delays, investors are beginning to scrutinize more carefully exactly how much contractual protection the relevant financing agreements can provide.
Morgan Stanley pointed out that a key question now is whether the Oracle incident is merely a special contractual dispute at a single project, or whether it could set a precedent prompting other data center tenants to take similar actions.
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 notably, Oracle took this action while the data center still had some time remaining before its scheduled delivery.
Morgan Stanley believes that Oracle "taking this step very early before the scheduled delivery date signals an escalation," and this raises a new question: whether this means Oracle will adopt a tougher stance on data center lease commitments in the future, and whether such an attitude could extend further to computing power contracts if its own customer demand comes under pressure.
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 incident comes as the massive funding needed for AI infrastructure construction is increasingly reliant 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 their own delay costs, 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 progress, 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 Oracle's move means the company is trying to evade its own debt repayment obligations.
However, the bank remains cautious about Oracle's credit condition, mainly due to the company's cash burn, relatively high adjusted leverage levels, and persistent credit rating risks.
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