Larry Ellison pledged Oracle stock on loans. Why is this dangerous for investors?

Billionaire Larry Ellison is not only one of the richest men in the world, but perhaps one of the most indebted, and that poses a risk to investors in shares of cloud services provider Oracle, The Wall Street Journal reports. The fact is that Ellison is actively borrowing money against his stake in the company. If the share price falls, creditors may start selling securities, which will only intensify the collapse of quotations.

Oracle papers account for 80% of Ellison's fortune, estimated at about $212.9 billion, the WSJ writes. At the same time, about 24% of Ellison's fortune is accounted for by Oracle shares pledged as collateral, the publication says. And this data before the billionaire acted as a guarantor for more than $40 billion in the deal Paramount Skydance, which is headed by his son David Ellison, to buy Warner Bros. Discovery. It's unclear whether the number of pledged shares has increased since those commitments - companies typically disclose such data once a year, the WSJ notes.

As of mid-April, Elisson owned nearly 1.2 billion Oracle shares, equivalent to about 40% of the company, the WSJ wrote. The value of that stake has halved from its peak in recent months as Oracle shares have fallen about 50% since September, the newspaper added.

To get liquidity without selling shares, top managers can borrow against their securities, the WSJ explains. Such pledges are required to be disclosed by companies, but they may only reflect the potential amount of borrowing, not the actual debt, the WSJ says.

If the stock price drops, creditors could demand the sale of some of the collateral to preserve the debt-to-value ratio of the collateral. This can only exacerbate the decline in stock value, especially for someone with a significant stake in the company, the WSJ explained.

Oracle in its documents for regulators usually indicates that, according to the board of directors, Ellison "has sufficient financial capacity to pay his personal loans without recourse to pledged shares", writes WSJ. Representatives of Oracle and Ellison himself did not respond to requests for comment.

Wall Street is predominantly not expecting Oracle stock to crash. According to MarketWatch, the consensus target price of 45 analysts tracking the cloud provider's securities is $242.56, up 40% from their closing price on April 26. Most analysts recommend buying Oracle securities: they have 35 Buy and Overweight ratings versus nine Hold (advice to hold) and one Sell (sell).

This article was AI-translated and verified by a human editor