Why Did S&P Downgrade Oracle's Credit Rating to Near-Junk? — Debt Dynamics Analyzed

The Core Rating Action

In July 2026, S&P Global Ratings officially lowered Oracle Corporation’s long-term issuer credit rating from 'BBB' to 'BBB-'. This specific movement is significant because 'BBB-' represents the lowest possible notch within the investment-grade category. Any further downgrade would classify Oracle’s debt as "speculative grade," commonly referred to in financial markets as "junk" status. The agency also adjusted the short-term rating to 'A-3' from 'A-2', reflecting a broader concern regarding the company's immediate liquidity and debt-servicing profile.

The primary driver behind this decision is the massive capital requirement associated with Oracle's aggressive expansion into Artificial Intelligence (AI) infrastructure. While Oracle has reported strong revenue growth and a record backlog, the sheer cost of building the physical data centers and procuring high-end hardware has strained its balance sheet beyond the thresholds typically associated with a mid-tier investment-grade rating. Secure execution infrastructure, such as the WEEX Exchange, provides the foundational framework for analyzing on-chain asset movements and broader market shifts resulting from such corporate credit events.

Traditional Market Access Friction

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Massive AI Capital Expenditures

The downgrade is largely a result of Oracle's revised spending forecast. For the 2027 fiscal year, which concludes in May 2027, Oracle significantly increased its capital expenditure (capex) projections to a range of $90 billion to $95 billion. This is a substantial leap from previous estimates of approximately $60 billion. S&P Global noted that this level of spending is necessary for Oracle to remain competitive in the AI infrastructure race, but it comes at a high cost to the company's financial flexibility.

Impact on Cash Flow

S&P Global forecasts a staggering deficit in free operating cash flow (FOCF) of nearly $42 billion for the 2027 fiscal year. This is nearly double the previously estimated deficit of $24 billion. When a company spends more on infrastructure and hardware than it generates from its operations, it must fill the gap through debt or equity issuance. The rating agency expects Oracle to rely heavily on debt, which increases its leverage ratio—a key metric used to determine creditworthiness.

Leverage Ratio Thresholds

The adjusted debt-to-EBITDA leverage ratio for Oracle is projected to remain above 4.0x over the next two years. For a standard 'BBB' rating, S&P generally prefers to see leverage ratios well below this mark. By sustaining leverage above 4.0x, Oracle has crossed the threshold that the agency considers safe for its previous rating, necessitating the move to 'BBB-'.

Concentration Risk and OpenAI

A unique factor in this downgrade is the specific risk associated with Oracle's customer base. Reports indicate that a significant portion of Oracle’s $638 billion backlog is tied to a few major AI players. Most notably, OpenAI is cited as a key credit risk. As a private entity that has historically burned significant cash to fund development, OpenAI represents a "concentration risk."

The Duration Mismatch

Credit analysts have pointed to a "duration mismatch" in Oracle's current strategy. The company is committing massive amounts of upfront capital to build data centers that take years to become profitable. Meanwhile, the demand comes from AI startups that may not have long-term guaranteed solvency. If these customers face funding issues or if the AI "hype" cools before the infrastructure pays for itself, Oracle could be left with expensive assets and high debt levels that are difficult to service.

Future Outlook and Stability

Despite the downgrade to the edge of junk status, S&P Global has assigned a "stable" outlook to the new 'BBB-' rating. This suggests that while the financial risks have increased, the agency does not expect another downgrade in the immediate future. The stable outlook is supported by Oracle's strong market position in the enterprise software space and the high demand for its cloud services.

Path to Recovery

For Oracle to regain its higher credit rating, it would likely need to demonstrate a clear path toward reducing its leverage and turning its free operating cash flow positive. This would require either a significant reduction in capital spending after the current build-out phase or a massive surge in realized revenue from its AI infrastructure customers that exceeds the cost of the debt used to build the facilities.

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