Data Centers: the Big Turn to Capital Markets

In recent months, a notable trend has emerged in the financing of data centers across Europe. After initial construction phase mainly financed by bank debt, many DCs are now refinanced through Private Placement, Asset-Backed Securities (ABS), and other market products.

We sat down with Robert Wallin, Managing Director - Telecom Sector, Claire Strady, Managing Director - Infrastructure & Energy Finance, Anthony Ferraro, Head of Debt Capital Markets Americas, Julien Devaux, Head of Infrastructure & Energy Finance London, and Rebecca Smith Cross-Asset Originator in Green & Sustainable Hub, to discuss the underlying reasons for this shift and its implications for the industry. 

Robert Wallin: We've seen a significant increase in new builds coming to the market in the last two years. The growth in data storage demands, largely driven by cloud services and more recently artificial intelligence developments, has created an unprecedented need for constructing and financing data centers. Traditional bank balance sheets are strained to fully support all the short-term financing of new constructions and potential long-term refinancing once these facilities become operational, should capital market solutions not be available. 

Claire Strady: Consequently, banks turn to new liquidity sources among investors, utilizing capital markets alternatives like private placements and ABS. While banks are still crucial during the construction phase - thanks to their flexibility and expertise in managing construction phase, capital markets solutions fit completely with mature business profile of these assets post-construction. To achieve optimal refinancing terms, assets generally stabilize before capital markets refinancings can take place. 

Anthony Ferraro: This practice of placing asset-backed debt with institutional investors is already well-established in the capital markets and is fairly mature in the data center segment in the United States. The lag with Europe can be attributed to the previously adequate availability of bank financing, a lack of expertise among local institutional investors, and the need for rating agencies to refine their methodologies. 

Claire Strady: Yes, intensive discussions are ongoing since 2024 with main data center operators (Edgeconnex , Digital Bridge, IPI, ...), rating agencies, investors and capital market structurers to optimize the capital structure and pricing of these refinancings through capital markets.

Anthony Ferraro: Though we have only a few precedents so far since the market is still in its infancy in Europe, Natixis CIB has been involved in three of the four European transactions since start of 2024. Most recently, we priced a £640 million ABS for Vantage Data Centers Germany in June, which is a milestone as the first ABS for a data center in Europe, refinancing two sites in Berlin and Frankfurt. This transaction was a tremendous success and will serve as an important precedent to continue to build the ABS market in Europe.  We also see strong momentum emerging in the private placement bond market, with several transactions in process and near completion.

Julien Devaux: We also just executed the first US Private Placement (USPP) in Europe. This optimizes the capital structure of the issuer and attracts new categories of lenders. We're actually working on a €500 million bridge to capital markets for IPI, which will refinance three data centers in Italy.

Robert Wallin: First, the overall quality of the underlying assets, which in an otherwise turbulent market (geopolitical…) represent somewhat of a safe haven. Data center assets are seen as infrastructure investments which are essential for the digital transition, with high barriers to entry and stable cash generation, in a growing market. Some investors are equally drawn by the quality of the portfolios that some of the developers have created. 

Anthony Ferraro: On a market perspective, we observe that the current market conditions are favorable. The data center asset class is increasingly recognized by institutional investors as core infrastructure of the future. From a credit risk perspective, hyperscale data centers are generally long-term contracted with highly rated counterparties. For example, 55% of our exposure is linked to Microsoft subsidiaries, which hold a AAA rating, followed by Amazon subsidiaries with a 10% share and AA rating.  

Claire Strady: The dynamics of the market indicate strong resilience. Capital market products represented approximatively one-quarter of global telecom financings in 2023 and are expected to double by 2030. The investor base is diversifying, and distribution channels are evolving with products like ABS, USPP, CLOs, and portfolio sales.

Robert Wallin: Natixis CIB is deeply committed to supporting the energy transition, and we view telecom as one of the pilot sectors for integrating Environmental, Social and Governance (ESG) risk analysis within our credit process for Infrastructure & Energy Finance. Indeed, we focus on energy-efficient data center developers and offtakers with a similar aspiration. We're in the process of updating our lending policies to better incorporate these ESG considerations.

Rebecca Smith: In addition, and complementary to this risk-based approach, we also look at data centers from a sustainable finance perspective: their efforts to actively mitigate their externalities and bring a positive contribution, from an environmental and social perspective. Data centers are coming under increasing scrutiny due to their resource use; it is thus even more crucial to address these challenges head on. Structuring the financing as green allows borrowers to bring more visibility to their efforts and strategy, and this commitment and transparency is appreciated by lenders and investors who are increasingly seeking this information. We are happy to have been involved in several data center finance deals as green loan coordinator.

Claire Strady: In Europe, all major Natixis CIB’ s Data Centers platforms participate to the Climate Data Center Pact, which focus on electricity and water usage efficiency, and on renewable electricity supply.  They’re aiming for targets such as a maximum Power Use Effectiveness (PUE) of 1.3; matching 75% of electricity demand with renewable resources by 2025; reusing water into closed circuits; and circular energy systems taking advantage of the heat generated by the servers for district heating.  

Julien Devaux: In addition, the ongoing transition to cloud computing inherently offers energy improvements. The shift toward large hyperscale data centers leads to significant energy efficiencies. Despite an exponential increase in computing workloads—from 10 million workloads to 310 million between 2010 and 2018—global data center energy consumption only saw a 7% increase, reaching an estimated 200-250 TWh in 2020, which is about 1% of global electricity use. 

Anthony Ferraro: The financing structures we are implementing are very incentivizing. Classic hyperscale datacenter lease contracts include a pass-through mechanism making the offtaker (Google, Amazon, Meta, Oracle, etc.) pay for the electricity used. Lower power use effectiveness of datacenters translates into lower total cost of ownership for customers and therefore makes the sites more attractive on the market.

As the landscape of data center financing evolves, the integration of capital markets is not just a trend but a necessary adaptation to meet the spiraling demands of our digital age. The collaboration between traditional banks and emerging investors seems set to reshape the future of this vital sector.

Thank you Claire, Rebecca, Robert, Anthony and Julien!