Oracle (ORCL.US) “Force Majeure” Notice Shakes the AI Bond Market! Damo: Data center financing contracts face re-examination

The Zhitong Finance App learned that Morgan Stanley said that Oracle (ORCL.US) issued a “force majeure” notice to the developer of a large data center in New Mexico, USA, which is prompting investors to re-examine loan and lease contract terms in AI data center financing, and adding new uncertainty to the AI infrastructure debt financing market, which is already facing multiple pressures.

Morgan Stanley analysts Lindsay Tyler, Vishwas Patkar and others said in a report released on Friday: “We anticipate that there are still a large number of projects at risk of construction or completion, as well as transactions supported by tenants with poor credit quality, which are most sensitive to this incident. In contrast, assets close to a stable stage of operation or with limited construction risk exposure should be relatively less affected.”

Currently, companies hoping to raise billions of dollars to build AI infrastructure through the debt market are already facing challenges such as rising borrowing costs, increased bond supply depressing risk premiums, and rising opposition to data center projects in many parts of the US. Morgan Stanley believes that Oracle's current attempt to avoid bearing related costs when the New Mexico project is postponed has also added uncertainty at the contract level to this pressured market.

The force majeure notice issued by Oracle quickly affected the credit market on Thursday. Interest spreads on datacenter-related bonds widened sharply, while the cost of providing five-year default protection for Oracle debt also soared to an all-time high.

The reason why this incident received great attention from bond investors is that a large number of data center construction financing previously used long-term leases signed by tenants with high credit ratings as important support. For creditors, the stable cash flow provided by such long-term leases is an important basis for evaluating the solvency of data center projects. As a result, when hyperscale cloud computing companies like Oracle try to invoke force majeure clauses to reduce the costs that may be caused by project delays, investors are beginning to take a closer look at the extent to which relevant financing agreements can actually provide contract protection.

Morgan Stanley pointed out that one of the key questions at present is whether the Oracle incident was just a special contract dispute for a single project, or whether it could set a precedent and prompt other data center tenants to adopt similar practices. “If another high-credit-quality hyperscale cloud computing company takes similar action, it may mean more to the market and may prompt investors to reevaluate contract protection mechanisms more broadly,” the analyst said.

More notably, Oracle took this action while the data center was still some time away from scheduled delivery. Morgan Stanley believes that Oracle “took this step long before the scheduled delivery date, which means the situation has escalated,” and this raises a new question: does this mean that Oracle will take a tougher stance on data center leasing commitments in the future, and whether this attitude may be further extended to computing power contracts if its own customer demand is under pressure.

This incident also revealed another problem in the AI infrastructure financing market, that is, investors still have limited understanding of the underlying contracts that support the AI construction boom. Since a significant portion of AI data center construction is completed with bank loans and private financing, related leases, computing power purchases, and other contracts are not as transparent as information on the open bond market. Morgan Stanley believes that this “limited visibility” makes it more difficult for investors to determine the actual risks of related projects.

At the time of the Oracle incident, the huge amount of money required for AI infrastructure construction was increasingly dependent on the debt market.

As technology companies, data center operators, and infrastructure developers invest heavily to build server clusters, power facilities, and related infrastructure, market financing requirements are rapidly increasing. At the same time, however, rising borrowing costs and massive bond issuance are putting pressure on credit markets. In this context, investors not only need to assess the construction and operation risks of the data center itself, but also pay more and more attention to whether the long-term leases that underpin the project are secure enough.

In particular, for projects that are still in the construction stage, if the main tenants can reduce their own extension costs through contract terms, then future cash flow, which was originally thought to be relatively stable, may face greater uncertainty, which in turn affects the risk pricing of related project debts.

As a result, Morgan Stanley believes that data center projects with early construction progress, high completion risk, and relatively weak tenant credit quality may be the most vulnerable to this incident; projects that are close to completion or have entered a stable operation stage are relatively more defensive.

Despite market concerns raised by this force majeure notice, Morgan Stanley did not believe that Oracle's move meant that the company was trying to evade its debt repayment obligations. However, the bank remains cautious about Oracle's credit status, mainly due to the company's cash consumption, high adjusted leverage levels, and ongoing credit rating risks.