"Cost of insuring against Oracle debt default spikes as September seems a long time ago" (ORCL)

If a CDS purchaser does not own the underlying debt they are flat out gambling. 2008 all over again where the payoff comes if you can put the debtor into default or worse. Talk about perverse incentives.*

From The Register, November 21:

Big Red borrows a lot of green, hopes AI will put it in the black 

opinion The weather's cooling, and so is Wall Street's patience with Oracle's AI makeover. Big Red is spending big, and the risk metrics aren't looking cozy.

It all started so well in September. Despite lackluster profit and revenue figures, Oracle’s shares climbed 30 percent when its first quarter results for FY2026 revealed its remaining performance obligations (RPOs) were stuffed with the promise of $455 billion, largely for its cloud infrastructure, briefly allowing co-founder and CTO Larry Ellison to claim the crown of the world’s richest person.

Jump forward a couple of months, and the chilly winds of winter are blowing in Oracle’s direction.

As Thanksgiving nears, financial traders have piled into Oracle’s credit-default swaps, in which the buyer gets some insurance against a debt default. The price of the financial instruments insuring against defaults for five years has tripled for Oracle in recent months, an indication of a perceived increase in risk.

Meanwhile, investors have flooded into the market, trading more than $5 billion (£3.8bn) in Oracle CDS since September, according to Jigar Patel, a Barclays analyst. In the same period last year, just $200 million was traded, according to Bloomberg.

To build out its cloud infrastructure in support of the AI goldrush, Oracle has committed to significant investment. Capital spending — largely on datacenters for AI — is set to hit $35 billion in fiscal 2026, up from $21 billion in fiscal 2025.

Shortly after it released its Q1 results, Oracle announced a $300 billion cloud compute contract with OpenAI, and KeyBanc analysts warned that Big Red may need to borrow roughly $100 billion over the next four years to build the datacenters required.

Oracle has already raised $18 billion in bonds, and is likely to raise $38 billion more with more than $100 billion on its balance sheet. Credit agency Moody’s kept Oracle’s rating the same. Still, they introduced a new overhang owing to significant "counterparty risk" in Oracle's projected growth — the possibility that another party fails to meet its obligations.

At which point, it might be apt to point out that LLM provider OpenAI hasn't yet turned a profit, raising fair questions about its ability to pay Oracle....

....MUCH MORE 

 *"Woman in China, 45, made S$589,800 by buying insurance on flights she predicted would get delayed"

Buying insurance on flights you aren't going to take is oddly similar to buying Credit Default Swaps on debt you don't own.
But the latter is legal.

It shouldn't be, tho.

See, if interested:
December 2014
Perversity and Credit Default Swaps

 
It's Time to Regulate Credit Default Swaps Using State Gambling Laws 

*****

Side bets are a description of what bucket shops do and there are anti-bucket shop laws on the books of just about every state. Federal pre-emption you argue? Nothing a one-line tweak of the Commodity Futures Modernization Act wouldn't solve.

The ideas are not original to me. Former New York Insurance Superintendent Eric Dinallo said: 

“It’s legalized gambling. It was illegal gambling. And we made it legal gambling…with absolutely no regulatory controls. Zero, as far as I can tell,”

And earlier posts:
July 2010 
Financial Reform: Enforce New York's 1908 Bucket Shop Law and trash the 2,319 Page Dodd-Frank Bill

It is time to dispense with this congressional foolishness and enforce the 1908 Bucket Shop law.
Throw in some state anti-gambling statutes and you would have prevented the financial meltdown....

November 2011
Are Derivatives Contracts Nothing More than Unenforceable Gambling Debts?
...Here's the U.S, Senate testimony of Eric Dinallo, then-Superintendent of the New York State Insurance Department on October 14, 2008 (8 page PDF).

...I have argued that these naked credit default swaps should not be called swaps because

there is no transfer or swap of risk. Instead, risk is created by the transaction. Indeed, you

have no risk on the outcome of the day’s third race at Belmont until you place a bet on

horse number five to win....

...“Bucket shops” arose in the late nineteenth century. Customers “bought” securities or

commodities on these unauthorized exchanges, but in reality the bucket shop was simply

booking the customer’s order without executing on an exchange. In fact, they were

simply throwing the trade ticket in the bucket, which is where the name comes from, and

tearing it up when an opposite trade came in. The bucket shop would agree to take the

other side of the customer’s “bet” on the performance of the security or commodity.

Bucket shops sometimes survived for a time by balancing their books, but were wiped

out by extreme bull or bear markets. When their books failed, the bucketeers simply

closed up shop and left town, leaving the “investors” holding worthless tickets.... 

For additional commentary see also:
"Pope says credit default swaps are unethical"

....the Vatican press office with:

“‘Oeconomicae et pecuniariae quaestiones’. Considerations for an ethical discernment regarding some aspects of the present economic-financial system” of the Congregation for the Doctrine of the Faith and the Dicastery for Promoting Integral Human Development, 17.05.2018

Regarding default swaps, if the purchaser doesn't own the underlying instrument they are, straight up, gambling.
And the problem Wall Street has is that gambling is usually regulated at the state level and state's usually say that unless they can get a cut of the action gambling is illegal.....

....MUCH MORE