Debt Financing Data Centers

As data centers play an increasingly important role in the digitization of the global economy and society at large, the means by which data centers and related assets can be debt financed has become a key focus for market participants. 

Perhaps uniquely as an asset class, data center financing can take a variety of structures that can provide debt financing from a range of different sources. Sidley is at the forefront of establishing these often-novel structures, from traditional project financing, all the way through to asset-backed and mortgage-backed securitizations.  

The approach taken to financing a particular asset, portfolio, or transaction will be shaped by several factors, including: 

• whether the financing is for a greenfield project or a brownfield facility which is being acquired, updated, or having its capacity expanded;
• whether there will be financing of a single asset or a portfolio of assets (portfolios allowing a greater spread of risk and the flexibility to have assets in different stages of development and operation);
• the source of revenue for the data center (whether there be a limited number of hyperscale users or a broader base of enterprise customers, for example), the duration of the revenue contracts, and the creditworthiness of the customers;
• technical specifications of the data center, in particular whether these enable scalability; and 
• the location of the data center in terms of jurisdiction (and specific quirks this introduces) and market (and related thinking around market share and competitors).

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Sidley assists its clients on a diverse array of data center debt financing structures.

• Project financing for greenfield projects, including cost overrun facilities;
• Acquisition financing typically with capex and working capital facilities available on day one;
• Infrastructure financing for operational assets with term, capex, and working capital facilities available on day one;
• Holdco financing and preferred and convertible equity back-leveraging structures to unlock additional debt capacity for data centers generating steady cash flows;
• Borrowing base facilities for a pool of data centers with debt capacity fluctuating as the pool of assets and their cashflow fluctuates;
• Green / ESG-linked loans / Green bonds with a focus on energy, water, and reducing carbon emissions for lower finance costs and gaining access to additional finance sources; and
• Asset backed and mortgage backed securitization: ABS and/or CMBS issuance, whereby the rental payments from data center tenants generate the required cash flows to service either the asset-backed or mortgage-backed securities.

In many deals, we work with our clients to combine two or more of these types of debt for the data centers, and in some cases the related power generation or microgrid facilities, and our ability to handle the multiple types of debt and investments allows us to act as a one-stop shop for our clients.

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Whatever the structure followed, we work with our clients to address some of the key contractual and bankability issues on which debt finance providers are focused.

Customer offtake agreements (where relevant)

• this agreement (or agreements) is key for certainty of revenue;
• key terms include: pricing mechanics (and their certainty), particularly terms regarding pricing uplift over time, the term (where there are
• multiple customers, their weighted tenor), and renewal rights/obligations, termination rights, confidentiality, indemnities, and performance credits;
• an approved customer onboarding regime and terms may be legislated, where offtakes will be entered into across the life of the loan; and
• the counterparties’ creditworthiness or access to credit support is also key for lenders.

Supply-chain contracts (where relevant)

• these agreements can be key in financing arrangements involving asset-backing (where, for example, advanced semiconductors are utilized as security key terms include term and termination rights, committed volumes, recourse rights).
  

Power contracts

• key considerations being cost and term, but also the reliability of the power source and the ability to upscale as needed;
• the production of power is on-site or from private sources; and
• the likelihood of being able to replace the relevant power source will be important to a lender’s assessment of risk and their ability to realize value from the asset on enforcement.

Construction contracts

• where a data center is being constructed, lenders will prefer, where possible, a fixed cost construction contract; and
• if the contract is not fixed cost, lenders will look for access to equity or other cost overrun facilities to cover gaps in funding.

Operation and maintenance contracts
Direct agreements

• where financing is provided at the opco/propco level, lenders will commonly seek to have a direct contractual arrangement with the relevant counterparty for some or all of these key contracts;
• this is usually documented through a direct agreement which, alongside including the counterparty’s consent to the lender’s security over rights in the contract (and pre-approval to enforcement of such security), may include the requirement for the counterparty to give notice of breaches and notice prior to exercising rights of termination; and
• it may also permit the lender to step in or cure a breach to ensure the contract remains on foot and the data center trading as an ongoing concern.

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