AI investment boom hits the bond market

On Wednesday, Oracle priced an $18bn six-tranche (5yr/7yr/10yr/20yr/30yr/40yr) bond deal which was increased from an initial $15bn on the back of exceptionally strong demand. It is the latest sign that the AI investment boom, long the focus of equity markets, is now spilling into credit.

The blockbuster issuance follows Oracle’s landmark $300bn, five-year cloud infrastructure contract with OpenAI (at $60bn per year, it is worth more than Oracle’s current annual revenue) alongside speculation of further partnerships with Meta and its potential hosting of TikTok’s US algorithm.

Initial price thoughts came with what we saw as a reasonable new issue premium of around 40bp on the five-year tranche and 35bp on the 10-year. Orders quickly swelled to over $87bn, nearly six times the original deal size, allowing the lead managers to tighten pricing by around 30bp across the offering while still leaving 5-10bp of premium. The deal was increased from $15bn to $18bn to reflect both Oracle’s capital needs and the scale of demand, with the new issue premium looking attractive relative to the low single-digit premiums we have seen in recent investment grade (IG) issuance. Demand was strongest for the benchmark 10-year ($19bn of orders) and 30-year ($17bn of orders). Interestingly, a planned five-year floating rate note was dropped, likely reflecting investors’ comfort with duration at current US Treasury levels, though we ourselves remain more cautious given we believe the market’s current projections for Fed rate cuts are overly optimistic. The sheer size of the deal pushed Oracle’s outstanding bonds around 5-10bp wider across the curve. The new deal performed well on the break, with all tranches tightening by approximately 5bp in secondary trading, highlighting the attractive premiums on offer.

Oracle’s $18bn raise highlights both the scale of investment required for the buildout of AI and cloud infrastructure, and the market’s demonstrable willingness to finance it on competitive terms. With a $455bn contracted backlog and the landmark OpenAI deal, Oracle has strong visibility on future revenues, but leverage is likely to remain elevated as this capex is drawn down. CreditSights estimates debt could rise by $50bn over the next three years, implying $65bn in gross issuance from Oracle once maturities are included, but yesterday’s transaction suggests the appetite is there.

September has already delivered strong issuance in US investment grade – 10 issuers raised $16bn on Tuesday alone, with month-to-date volume at $172bn even before the Oracle deal and Wednesday’s other issuance. September issuance is now on track to surpass $200bn, which would make it one of the heaviest supply months on record. Despite the deluge, spreads remain at multi-decade lows (72bp on the Bloomberg US IG Index), orderbooks are strong and new issue premiums are minimal, highlighting investor appetite to lock in what are still healthy overall yields.

Strong fund flows also continue to provide a firm technical backdrop for IG credit. Spreads remain tight against a still challenging macro environment, but attractive all-in yields are evidently keeping investors engaged. We remain selective, with a preference for high-quality, non-cyclical, cash-generative sectors such as utilities and telecoms. Looking ahead, we expect the primary market to stay well supported, with further AI-related capex needs driving issuance across both technology infrastructure and energy markets.