Hyperscaler Alert: Domino edition

This chart shows the current S&P Global credit rating for the 6 largest hyperscalers. Oracle’s credit rating was dropped to BBB- on July 9.

The next drop moves them to junk status.

Don’t let anyone tell you that “credit ratings don’t matter.” They matter – a lot. Funding costs are a function of the credit rating. If ORCL falls into junk status, a lot of things will happen to them, and all of them are bad.

This is an own goal on Oracle’s part (notice the World Cup reference there?). They put themselves in this position by over-extending, by ignoring the fundamentals, and by using off-balance sheet structures to try to make the books look a lot better than they are. This is precisely the formula that brought down Enron 25 years ago.

I don’t have any particular beef against Oracle. I care about Oracle only because they could easily become the first domino in a downward spiral of over-extended and over-leveraged companies, and these 6 companies account for a staggering part of the economy. If investors lose confidence in the level of infrastructure buildout, understand the revenue that will be needed to make these things profitable, and start paying attention to the unprecedented level of debt being run up by these companies, there will be a rush for the door.

And if history is any indicator, if these firms get in trouble they could well take the rest of the economy with them.

Is Oracle the first domino?