Oracle's problems are not Oracle's alone.
Oracle issued a "force majeure" notice that could allow it to delay paying full rent for its New Mexico data center campus dubbed Project Jupiter, if it misses its planned 2028 opening.
The move could allow Oracle to delay expenses and better align them with revenue if the facility is held up by community resistance, challenges over power supply or regulators. But even if the move seems prudent on the surface, it's an annoyance for Oracle's bondholders.
Oracle's "notice does not change the financial commitments to this multi-year project," investment firm Blue Owl Capital, whose unit is developing the site, told CNBC.
Oracle and Blue Owl did not immediately respond to Barron's requests for comment.
Oracle's expenses over the long haul remain unchanged and the notice could only reduce some of Oracle's near-term cash needs. Yet questions about when the artificial intelligence revenue stream comes in and when Oracle starts making rent payments are a source of uncertainty. This added layer of risk provides zero reward for bondholders, who seek reliable interest payments and principal at maturity.
The result? Oracle bond prices fell further on Friday morning. When prices fall, yields rise, and this seesaw effect meant a 30-year bond issued by Oracle this February was yielding 8.16%. That's up from 7.96% before the force majeure news and 7.09% this summer. Rising yield hit holders of long-duration bonds the hardest; for every year of duration, a 1% rise in yields cuts a bond's price by roughly 1%.
The rise, however, is small-or precisely 0.19 percentage. While the potential delay adds some execution risk premium, the reality is that Oracle's project isn't canceled, and its spending commitments haven't changed. Oracle's co-CEO Clay Magouyrk said on a call discussing earnings on Sept. 10 that the New Mexico data center wouldn't affect its revenue or earnings projections for the current fiscal year ending in May 2027.
"It is also important to note that Project Jupiter is only one part of Oracle's infrastructure strategy, and this announcement is not an indication that this project is going away," Evercore analyst Kirk Materne wrote.
The spillover from Oracle news was also limited. Yields on 30-year bonds issued by the other four hyperscalers ,or large data center operators-Amazon.com, Meta Platforms, Microsoft, and Alphabet-are up an average of 0.16 percentage points.
Credit default swaps, a gauge of default risk, offer another check on investors' willingness to stomach risks associated with data center execution. Oracle's five-year CDS traded at 227.5 basis points on Thursday night, according to Bloomberg data. That means it costs $227.50 a year to insure $10,000 of Oracle debt. While that's a record high, it's up only slightly from the prior level of 224 basis points.
Morgan Stanley credit research analyst Lindsay Tyler maintained a cautious view on Oracle debt, "with this new overhang exacerbating existing pressures," though she stopped short of recommending investors avoid the debt.
"Visibility into underlying contractual terms, and thereby into ORCL's mindset here, remains limited, given the use of private financing by the developer," Tyler added.
Austin, Texas-based Oracle-which has approximately 181 data centers globally, many of them leased-had issued $43 billion of debt in the latest fiscal year. Its overall debt pile stands at $125 billion.
Goldman Sachs said last month that it expects the five hyperscalers to issue $250 billion in debt in 2026. The total is expected to grow as AI capital needs rise. Market consensus is for the largest U.S. hyperscalers to spend $800 billion this year and $1.1 trillion in 2027.
Hyperscalers "spending now exceeds cash flow from operations, which means large further growth will increasingly need funding via debt and equity issuance," Goldman strategist Ryan Hammond wrote on Thursday.
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