One of the first things they teach you in lending, or anyway one of the first things you learn, is diversification. Don’t lend all your money to one guy. Lend a little to a media company, a little to a software company, a little to a grocery chain, and the odds that they all blow up at once are low. The media company’s borrowers binge-watch; the software company’s borrowers migrate to the cloud; the risks are uncorrelated. This is a good theory, and it works right up until the moment you discover that the media company and the software company are both, in some meaningful sense, the same 82-year-old man from Redwood Shores.
That is the dawning realisation on Wall Street about Paramount Skydance Corp. and Oracle Corp., both of which are vaulting into the ranks of corporate America’s biggest borrowers, and both of which trace back to billionaire Larry Ellison. As Bloomberg reports, the links are “starting to stir angst” among investors.
Start with the Paramount side. Paramount took on $52 billion of additional debt this week to help pay for its acquisition of Warner Bros. Discovery Inc. — a financing package that, according to Octus, ranks among the largest leveraged buyout financings on record. The deal is spearheaded by Ellison’s son David. On the equity side, there’s roughly $47 billion of equity financing, and Larry Ellison, through a family trust, guaranteed a significant portion of it. So if the deal wobbles, the elder Ellison is on the hook.
And the hook goes deeper than the acquisition price. As Paramount worked to reassure the ratings firms about the debt burden the combined company would carry, the Ellison family pledged to take all necessary steps to help bring leverage down in the coming years. Credit graders and investors read that — reasonably — as a tacit promise to inject additional capital if needed. Nobody signed a contract that says “Larry writes a cheque in a downturn.” But everyone priced the debt as if he would.
Now the Oracle side. Much of the Ellison family’s wealth is tied up in Oracle shares. Oracle, meanwhile, is in the middle of its own capital-intensive buildout of artificial-intelligence infrastructure — data centres are expensive, and Oracle is borrowing heavily to build them. So the asset that backs the Paramount safety net is the same asset being leveraged to fund Oracle’s AI ambitions. Imagine you are a Paramount bondholder. You were promised, in effect, that a very rich man would rescue you. Then you look at what the very rich man’s fortune actually consists of, and it is stock in a company that is itself stretching to fund an enormous bet. Your safety net and somebody else’s moonshot are the same pile of shares.
The market has noticed. Money managers say the cost of insuring the debt of both companies against default has converged and is increasingly moving in lock-step — which is the bond market’s way of saying it has started treating the two credits as one credit wearing two hats. Campe Goodman, a portfolio manager at Wellington Management Co., put it directly: “You have to consider your total Larry Ellison risk.” Investors, he said, should regard Oracle and Paramount as related bets rather than completely separate credits: “You probably want to consider your exposure to both.”
“Total Larry Ellison risk” is a wonderful phrase, because it names something that doesn’t appear in any covenant. On paper, a loan to Oracle and a loan to Paramount sit in different sectors, different industries, different silos of a portfolio. In practice they share a single point of failure, and that point of failure is one man’s net worth and willingness to part with it. The diversification was an illusion; the correlation was hiding in the shareholder register.
To be clear, nobody is saying Ellison can’t make good. He is one of the richest people alive, and Paramount and Oracle representatives didn’t respond to requests for comment; attempts to reach Ellison through his foundation also went unanswered. The worry is subtler than solvency. It is that the value of the backstop could come under pressure at exactly the moment Paramount needs it most — because the events that would hurt a highly leveraged media merger, or an expensive AI buildout, or tech stocks generally, have a way of happening together.
That is the thing about personal guarantees. They diversify the borrower’s risk beautifully. They do nothing at all for the lender who thought he owned two different loans and finds out he owns one wealthy family’s goodwill, twice.