Non non-recourse
The words data centre are very much the two buzz words in the financing market right now. A mere US$30bn plus is being raised in just two project bonds in the US while investment analysts debate whether the whole AI-fuelled market is overcooked. Project financiers looking at the underlying credit qualities can be just as confused.
The bigger of the two US deals, Beignet Investor, is comfortably in investment-grade territory at A+ via S&P. The US$27.3bn, yes US$27.3bn, Blue Owl/Meta deal runs for 24 years but the financing is backed by a construction guarantee, minimum rent supports until full repayment and a unique residual value guarantee which mitigates the risk of lease non-renewal or termination.
The guarantees are provided by Meta, rated AA–. You could therefore say investors in this bond, which backs construction of 2GW of capacity in Louisiana, are getting a yield uptick from normal Meta financings. But you would have to be comfortable Meta will still be thriving in 24 years' time. That is an open question.
The smaller deal, a US$3.bn five-year financing for Wulf Compute, a unit bitcoin miner turned artificial intelligence infrastructure provider TeraWulf, is comfortably in sub-investment-grade territory at BB via Fitch. The deal, backing 450MW of capacity in New York state, does not have a construction guarantee. Google, which owns 14% of TeraWulf, has provided a backstop on the Fluidstack lease with full paydown due within the initial 10-year lease term. Wulf Compute, however, does own a 72.5MW facility which is due online by year-end.
Clearly both deals are getting over the line due to credit support of varying degrees from two of world's top five tech companies – the other three being Microsoft, Apple and Amazon. Given the pace of change in the tech industry, it is fairly certain these five titans will look different in a decade, let alone 25 years.
Speaking at PFI's recent FEPA conference in Singapore, longstanding project financier Ramakrishna Pataballa from BNP Paribas pointed out in the data centre sector banks are dealing with "very, very powerful, big hyperscalers in many instances, so the bargaining power they have is quite good which is good because most of our lenders will rely on such hyperscalers' ability to continue to pay for long term in giving non-recourse financing."
Low Kian Min, chief renewable officer at Gentari, said developers are dealing "with commercial entities, you know, that has got revenues the size of GDPs of certain countries or exceeding the GDP of certain countries, so they are of scale. They know they are good credit and therefore have the ability to demand and extract certain commercial terms".
Solid power or LNG-style offtakes are not usually available from the tech world, so the credit analysis is more complex. Yet, at the same time various stock analysts are worried the Al boom is overdone.
Pattaballa pointed out that data centre deals have new complexities. "One obvious one will be the early termination options, for example. We are not used to such structures in long-term financing, so we as lenders have been adapting to see, okay, this is part of the industry, so how do we take care of this? Similarly, you have renewal options, recontracting options, which were never accepted in long term."
Abhishek Dangra, a managing director at S&P Global Ratings said hyperscalers have very strong credit quality but judgments over the long term become challenging. "What is the length and tenor of the contract? Five years. Another extension of five years and maybe sitting today we have good visibility of saying yes, five years down the line, 10 years down the line. What about 25 years? Would the prices be significantly different from the prices that we see today? The sponsors do expect lease rentals to go up further, and which is what they are building into their base case at the time of the renewal. But looking at it from a debt perspective, what if some of this demand supply does not play out? What if the AI monetisation for all the hyperscalers does not play out the way it is expected to be? Then what in 25 years?"
Data centre developers finance the actual building via structured financings but the hyperscalers put in the kit – which often costs as much. Lee-Kong-Min, a director at Mizuho draws comfort from this fact. "The hyperscalers are putting in a multiple of that amount in terms of the servers, in terms of the cables, in terms of the racks that go in. It's very sticky for them. And if you think about renewals, what are these hyperscalers doing? They are providing cloud services for companies' data. They are providing, let's say, security. They are providing AI models that run on maybe Azure or Copilot. And as you know, as an enterprise, it's very sticky to switch."
Banks are having to go further to meet the needs of the sector. Developers are seeking pre-contract loans in order to ensure they can sign up tenants even before construction starts. And banks are providing GPU loans, ie to the kit in the centres themselves. Non-recourse? We are all in this together.
