Oracle (ORCL.US) "Force Majeure" Notice Shakes AI Bond Market! Morgan Stanley: Data Center Financing Contracts Face Reassessment

According to Zhitong Finance APP, Morgan Stanley stated that Oracle (ORCL.US) has issued a "force majeure" notice to the developer of a large data center in New Mexico, USA, prompting investors to re-examine loan and leasing contract terms in AI data center financing, adding new uncertainty to an AI infrastructure debt financing market that is already under multiple pressures.

Morgan Stanley analysts Lindsay Tyler and Vishwas Patkar said in a report released on Friday, "We expect that projects still facing significant construction or completion risks, as well as transactions supported by tenants with weaker credit profiles, are most sensitive to this event. In contrast, assets that are closer to stable operation or with limited construction risk exposure should be relatively less affected."

Currently, companies hoping to raise billions of dollars in the debt market to build AI infrastructure are already facing challenges such as rising borrowing costs, increased bond supply compressing risk premiums, and heightened opposition to data center projects in various parts of the United States. Morgan Stanley believes that Oracle's recent attempt to avoid related costs when its New Mexico project was delayed further increases contractual uncertainty in this stressed market.

Oracle’s force majeure notice quickly reverberated through the credit market on Thursday, significantly widening spreads on data center-related bonds, while the cost of five-year default protection for Oracle’s debt also surged to a record high.

The reason why this event has drawn significant attention from bond investors is that a large portion of data center construction financing has previously relied on long-term leases signed with high credit-rated tenants as important support. For creditors, the stable cash flow provided by such long-term lease contracts is one of the key factors in assessing a data center project's debt service capability. Therefore, when a hyperscale cloud provider like Oracle attempts to invoke force majeure clauses to reduce potential costs from project delays, investors are scrutinizing to what extent related financing agreements truly provide contractual protection.

Morgan Stanley points out that a key question now is whether the Oracle incident is just a unique contractual dispute for a single project or could set a precedent prompting other data center tenants to take similar action. The analysts said, "If another high-credit quality hyperscale cloud computing company were to take similar action, its implications for the market could be much greater and may lead investors to more broadly re-evaluate contractual protection mechanisms."

More noteworthy is that Oracle took this action while the data center was still some time away from its scheduled delivery. Morgan Stanley believes that Oracle “taking this step well in advance of the anticipated delivery date signifies an escalation of the situation,” which raises a new question: does this mean Oracle might take a tougher stance on future data center lease commitments, and if its own customer demand comes under pressure, could this attitude even extend further to compute power contracts?

This event also exposes another issue in the AI infrastructure financing market, namely the limited understanding investors have of the underlying contracts supporting the AI construction boom. Since a significant portion of AI data center developments rely on bank loans and private financing, related leases, compute procurement, and other contracts are not as transparent as information in the public bond markets. Morgan Stanley believes this "limited visibility" increases the difficulty for investors to assess the actual risks of related projects.

The Oracle incident comes at a time when the massive funds required for AI infrastructure construction are increasingly dependent on the debt market.

As technology companies, data center operators, and infrastructure developers invest heavily in building server clusters, power facilities, and related infrastructure, market financing needs are rising rapidly. Meanwhile, increasing borrowing costs and large amounts of bond issuance are putting pressure on the credit market. In this context, investors need to not only evaluate the construction and operational risks of the data centers themselves but are increasingly paying attention to whether the long-term leases supporting these projects are solid enough.

Especially for projects still under construction, if the main tenants can use contract clauses to reduce their exposure to delays, previously considered stable future cash flows may face greater uncertainty, thus impacting the risk pricing of related project debt.

Therefore, Morgan Stanley believes that data center projects at early construction stages, with high completion risks and tenants of relatively weaker credit quality, may be the most vulnerable to impacts from this event; while projects near completion or at stable operation stages are relatively more defensive.

Although the force majeure notice has triggered market concerns, Morgan Stanley does not believe Oracle’s move means the company is seeking to evade its debt repayment obligations. However, the bank remains cautious on Oracle’s credit profile, mainly due to the company’s cash burn, relatively high adjusted leverage, and ongoing credit rating risks.