Investor interest in data centre ABS takes off – SCI esoteric seminar

The number of investors in data centre ABS deals has grown by threefold and there are now about 150-160 involved in the space, according to speakers at SCI’s second esoteric ABS seminar in New York last week.

Insurance companies comprise over half this number, with traditional asset managers also well-represented. But hedge funds, private equity firms, banks and pension funds are also in the mix.

The sector and the interest in it have exploded, agreed speakers. “When I go to cocktail parties, people don’t ask me about CLOs any more, they ask about data centres,” said one panellist.

Buyers have cottoned on the fact that data centres generally capture very high quality assets – “mission critical assets” as one speaker put it - and, in the case of hyperscale deals, only a limited number of tenants.

Not only do hyperscale deals have fewer tenants, the contracts are also often shorter, which further increases their attractiveness.

About 75% of new issuance is now from hyperscale centres and 25% colocation, say speakers. Even though there is often no difference in credit ratings, the market now prices in around a 75bp spread differential between the two.

However, it behoves investors to get to know the market fully before they commit capital to it, added panellists. No two deals are alike: tenants, assets and contracts vary appreciably. “Investors have to dig,” said one.

There are challenges for the sector. Credit ratings are often linked to the ratings of the operators as there is not sufficient data to derive a rating from the assets.

A ceiling on growth may also be imposed by the limitations of the electrical grid. Data centre growth has been so dramatic and they use so much electricity that state grids are sometimes struggling to keep up.

But the factors underpinning growth are irresistibly powerful. The move to the cloud and AI stand at the top of that list.

And while traditional bank lending still has a significant role to play in the provision of liquidity to the sector, the ABS market is now more often than not the chosen vehicle for developers.

“Demand for high quality tenants is off the charts,” said one speaker.

Simon Boughey