Oracle bonds lower following negative outlook; long-expected deal still in pipeline

By Cristal Cody

Tupelo, Miss., Sept. 23 – Oracle Corp.’s bonds moved lower on Friday following S&P Global Ratings’ negative outlook levied the previous day and growing speculation on a long-awaited high-grade debt offering.

A bond deal targeted at $20 billion from Oracle following the company closing in June on its $28.3 billion acquisition of Cerner Corp. was expected back in the summer and had been anticipated since the spring.

On Thursday, S&P affirmed the issuer’s BBB ratings, removed the issuer from Credit Watch with negative implications but also assigned it a negative outlook.

The Austin, Tex.-based enterprise software provider “did not issue notes and provide financial policy guidance during the last quarter as we expected,” S&P said in the note. “We will likely remain uncertain on the company's financial policy for longer than expected.”

A week ago, Oracle said in its 10-Q filing with the Securities and Exchange Commission on Sept. 13 that it borrowed $4.4 billion on Aug. 16 under a term loan credit agreement with the proceeds used to reduce debt under its bridge credit agreement.

Oracle reported in June that it helped finance the acquisition under its $15.7 billion delayed-draw term loan credit agreement due March 7, 2023.

The bridge credit agreement the company entered into in March has an interest rate at SOFR plus 100 basis points to 137.5 bps, depending on Oracle’s long-term senior debt rating, or a base rate formula plus a margin of zero bps to 37.5 bps, depending on the credit rating.

Oracle expects to maintain its high-grade rating following the acquisition.

The deal definitely remained on the radar of investment-grade desks on Friday, but timing is uncertain, according to market sources.

The company may be taking its time on pricing, considering the consistent market volatility and numerous no-deal sessions seen so far in 2022, sources report.

Volatility remains elevated on the backdrop of another 75-bps rate hike on Wednesday by the Federal Reserve, continued heavy fighting due to Russia’s invasion of Ukraine and other geopolitical events.

Lower M&A supply

New issue supply for the past week came in much lower than the low sides of forecasts of $10 billion to $20 billion.

Primary action nearly ground to a halt with only $6 billion of corporate bonds priced from six issuers with the U.K. markets closed Monday for the funeral of Queen Elizabeth II and the Fed’s rate decision on Wednesday.

Issuers stayed to the sidelines on Monday, one came on Tuesday, no one appeared Wednesday and the rest tapped the primary market on Thursday.

High-grade deal volume in the week ahead could stay thin or may climb to about $15 billion or higher, depending on market conditions, sources reported.

Deals from the mergers and acquisitions space declined in the second quarter and in August.

M&A-related investment-grade bond supply was “subdued” in August at $6.3 billion, compared to $7.5 billion in July, according to a BofA Securities Inc. research note.

The pipeline of deals with potential high-grade funding impact was mostly flat at $352 billion in August, BofA said.

Rising interest rates may contribute to discouraging strategic acquisitions for U.S. non-financial corporates, Fitch Ratings said in a September note.

“We have found that large acquisitions by corporate debt issuers often precipitate a rating downgrade of the acquirer, after reviewing selected transactions within our rated portfolio,” Fitch said. “Companies deterred from pursuing acquisitions may instead prioritize returning capital to shareholders through debt-funded dividends and stock buybacks.”

On Sept. 12, Oracle reported in its fiscal 2023 first-quarter results that dollar revenue was up 18%, but income was down 37%.

Oracle’s bonds have been among the most active high-grade corporate issues seen trading in September, a source said.

In the secondary market on Friday, the company’s’ 2.875% notes due 2031 (Baa2/BBB) traded down about 2 points on the week on an 80 handle and a yield of nearly 6%.

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