Ep93 - Securitization and data centers

Rachel, how do large operators typically fund data center construction?

That's a great place to start because the financing landscape for data centers has evolved quite significantly.

So this is sort of a background as to what's been going on for us here at Norton Rose Fulbright and in this industry over the past few months and past year or so.

So as you've probably seen, and many listeners may already know, large operators typically use a mix of corporate balance sheet financing.

So that's things like investment grade bonds, bank loans, et cetera, to fund early development.

Now, historically, some of the major players, big hyperscalers, other in the space, were able to fund their build outs largely from their own strong operating cash flows.

But with construction costs rising dramatically and everyone looking to expand very quickly, that free cash flow is being compressed and stretched.

And so now you see external debt financing is increasingly common, even for those major players.

So for private and sponsor-backed developers, the toolkit looks a little bit different.

They're going to rely heavily on asset-backed securities, So that's where bonds are issued against the revenues from a specific pool of data center assets.

You'll also see commercial backed securities.

So those are bonds secured against the fiscal real estate and also construction loans taken together Those structures typically fund around 60 to 70 percent of total capital costs.

You know, depending on the project could be different.

What's really striking is how broad the investor appetite has been.

So demand, you know, has been really strong across all of those channels.

And that tells you a lot about how the market views data centers.

as an asset class right now.

You hear both players saying that they're worried about being overextended there, and yet at the same time, it feels like folks just can't get enough of these deals and are clamoring to get in.

It's been a really fun, interesting space to be working in recently.