Oracle has been hit with a class-action lawsuit from investors who allege the cloud computing provider misled them about the amount of debt the company would need to take on to fulfil a US$300bn contract to supply OpenAI during a bond sale last September.
Ohio Carpenters Pension Plan filed a complaint with the New York County Supreme Court on Wednesday. It is suing Oracle, three of its executives and 16 underwriters on behalf of investors who bought into the company’s US$18bn bond offering on September 24.
It alleges that investors “suffered significant losses and damages” when – just weeks after the bond offering – reports emerged that Oracle would be taking out an additional US$38bn in bank loans to fund the construction of two data centres to fulfil its computing contract with OpenAI.
Bonds issued as part of the US$18bn deal in September sold off on the news. By mid-December, investors in the deal were sitting on more than US$1.3bn of paper losses. While bid prices for the bonds have since improved, all six tranches of the deal are still bid below reoffer, with the longest-dated bonds faring especially badly. The US$2bn 6.1% September 2065s, for example, are bid at 88.11 cash price, according to LSEG.
The complaint alleges that Oracle was “already planning” to increase its borrowings and “seek billions of dollars of additional debt” at the time of the September deal – but chose not to disclose that information to investors at the time, in a violation of securities laws.
“The offering documents were false and misleading and omitted to state that, at the time of the offering, Oracle was organizing to raise that additional debt, which would ultimately bring the creditworthiness of these bonds into question,” the complaint alleges.
At the centre of the dispute is a US$38bn project finance loan for two data centres in Texas and Wisconsin that are part of the Stargate supercluster being developed by OpenAI, Oracle and SoftBank. The deal, which is being arranged by JP Morgan and MUFG, is yet to close.
Co-defendants
JP Morgan is named as a co-defendant alongside 15 others involved in the September deal: Bank of America, Citigroup, Deutsche Bank, Goldman Sachs, HSBC, BNP Paribas, PNC Capital Advisors, SMBC Nikko, NatWest, Santander, TD Securities, BNY Mellon, Credit Agricole, ING and Standard Chartered.
“The underwriter defendants were also instrumental in soliciting investors,” the complaint alleges, adding that they assisted and abetted the “preparation and dissemination of the company’s materially inaccurate, misleading, and incomplete offering documents”.
Larry Ellison, the company's founder and executive chairman, is also named as a co-defendant – alongside Safra Catz, who was chief executive at the time of the deal, and chief accounting officer Maria Smith.
After initially rallying on the news of its US$300bn contract to supply compute to OpenAI in early September, with its market capitalisation almost reaching US$1trn, Oracle shares have since fallen by more than 40%, wiping more than US$430bn off its valuation.
Driving the selloff are concerns that Oracle is assuming too much financial risk to build data centres and buy chips to fulfil contracts with hyperscaler clients that won’t generate any revenue for years – assuming they are able to pay at all. Of those, one particular deal has come under scrutiny.
In December, the company moved to address the selloff by pledging to do everything it could to preserve its investment-grade rating at a meeting with analysts. It is rated two notches above junk: Baa2 by Moody’s, and BBB by both S&P and Fitch. The pledge marked a dramatic shift in policy for Oracle, which before the meeting had no formal debt or ratings policy in place.
Oracle declined to comment to IFR when asked about the lawsuit.