Moody's flags risk in Oracle's $300 billion of recently signed AI contracts

By Matt Tracy

WASHINGTON (Reuters) -U.S. credit rating agency Moody's Ratings flagged several potential risks in Oracle Corp's $300 billion of recently signed artificial intelligence contracts, but stopped short of taking ratings action against the software giant.

Oracle said this month it expected booked revenue at its Oracle Cloud Infrastructure business to exceed half a trillion dollars.

The Wall Street Journal then reported that OpenAI had signed a contract to purchase $300 billion in computing power from Oracle over roughly five years, marking one of the biggest cloud contracts ever signed. A majority of the new revenue Oracle described will come from the OpenAI deal, the report said.

Moody's analysts on Wednesday referred to $300 billion in recently signed contracts without naming the customers involved.

They noted the contracts highlight the "tremendous potential" for Oracle's AI infrastructure business. But they also brought attention to several risks laid out in Moody's July ratings action, where the agency revised Oracle's credit rating outlook to negative from stable.

One of the main risks flagged by Moody's involved the "counterparty risk" of Oracle relying on large commitments from a small number of AI companies to fund its business model.

"Counterparty risk is always a key consideration in any type of project financing, particularly where there is a high reliance on revenue from a single counterparty," Moody's analysts wrote on Wednesday.

"And in our view, Oracle’s data center build is effectively one of, if not the world’s largest, project financing," they added.

The analysts further noted the company will see its debt increase faster than its EBITDA, which will contribute to a forecast high leverage of 4x before Oracle's EBITDA begins to outpace its debt.

"It is likely that free cash flow will also be negative for an extended period before reaching breakeven," the analysts wrote.

Oracle had a Moody's issuer rating of Baa2, which is at the lower end of investment-grade credit ratings.

(Reporting by Matt Tracy; Editing by Jamie Freed)

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