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Two data center billionaires minted before anything is even built. A borrower seeking a loan for 150% of the construction cost. And companies that are using financial engineering to keep liabilities off their balance sheets.<\/p>\n
For the skeptics, those are some of the examples of why the artificial intelligence data center boom is getting out of hand.\u00a0<\/p>\n
There\u2019s a frenzy of development going on to support the AI revolution, and with it an insatiable demand for debt to fund it. Some estimate the overall infrastructure roll-out cost could reach $10 trillion, and with so many lenders lining up to throw cash at the assets, the fear is a bubble is building that could eventually leave equity and credit players facing substantial pain.<\/p>\n
\u201cOne key risk to consider is the possibility that the boom in data center construction will result in a glut. Some data centers may be rendered uneconomic, and some owners may go bankrupt,\u201d Oaktree Capital Management LP co-founder Howard Marks wrote in a\u00a0note\u00a0this week. \u201cWe\u2019ll see which lenders maintain discipline in today\u2019s heady environment.\u201d<\/p>\n
Given the flood of money going in, another danger is that there will be less credit available when facilities being constructed now using loans are in need of refinancing in three to five years\u2019 time.\u00a0<\/p>\n
There\u2019s also growing concern about the level of\u00a0leverage, particularly given the technology may underperform its high expectations. In such a scenario, lenders may be even more reluctant to refinance, and companies would have to find additional equity or pay more to borrow.<\/p>\n
\u201cMomentum is strong, but if this is irrational exuberance, investors will lose when the music stops,\u201d said Sadek Wahba, chairman and managing partner at infrastructure investor I Squared Capital. He said his firm is trying to be careful, cautioning that \u201cevery deal has nuance, and the fine print matters.\u201d\u00a0<\/p>\n
The broader AI universe has also been caught up in the worries, with\u00a0circular deals\u00a0and soaring valuations taking a toll on the\u00a0bullish sentiment\u00a0that once dominated.<\/p>\n
At Brookfield, Chief Executive Officer Bruce Flatt sees $5-$10 trillion of spending to finance the roll out of AI across everything from data centers to power infrastructure. McKinsey & Co. estimates\u00a0almost $7 trillion\u00a0is needed by 2030 just on data centers, including those for AI.<\/p>\n
\u201cThese are sums that have never been invested before,\u201d Flatt said.<\/p>\n
OpenAI, for example,\u00a0has plans\u00a0to spend $1.4 trillion on AI infrastructure \u2013 and would spend more if it could. Chief Financial Officer Sarah Friar has repeatedly said that the company\u2019s only constraint was finding more computing capacity.<\/p>\n
If the scale of the deals is one worry, another surrounds how they are being packaged and structured.\u00a0<\/p>\n
Lenders are slicing and dicing debt and selling it on to other investors, meaning it becomes more and more opaque, according to Vinay Nair, chief executive officer at fintech platform TIFIN and a teacher in executive education programs at The Wharton School.<\/p>\n
\u201cYou\u2019re spreading this risk through the system,\u201d he said. If there\u2019s a decline, \u201cI don\u2019t think we totally understand all the ripple effects of this through that credit channel.\u201d<\/p>\n
Some borrowers have been shifting the risk from AI data centers off their balance sheets using the securitization markets, where the debt is tranched into slices with varying risks and returns and bought up by the likes of insurers and pension funds. A similar story is emerging in the graphics processing units that process the data.<\/p>\n
With the lending environment so positive, some borrowers are even asking for more than 100% of the build cost for projects, according to two private credit lenders, who asked not to be identified as the details are private. In one case, the request was for 150%, with the property developer justifying the request on the basis of the uplift in valuation of the facility when rents start flowing, one of the people said.\u00a0<\/p>\n
Meanwhile, there\u2019s also a risk of hype at play. Nuclear startup Fermi Inc. has yet to develop any data centers, but its valuation briefly jumped to more than $19 billion when it listed this year. That\u2019s made billionaires of founders Toby Neugebauer and Griffin Perry, son of former US energy secretary Rick Perry.<\/p>\n
But there\u2019s also increasing market jitters about the borrowing and spending.<\/p>\n
Fermi has slipped back below the level at which it went public. Concern about Facebook parent Meta Platforms Inc.\u2019s spending\u00a0hit its stock\u00a0in late October and Oracle Corp.\u2019s\u00a0slumped\u00a0this week after the company reported a jump in investment in data centers and other equipment.<\/p>\n
For years, landlords financed data centers with a combination of equity and debt and leased out the space. Hyperscalers, large cloud computing providers like Microsoft Corp. and Alphabet Inc.\u2019s Google, also developed sites themselves as cloud services took off.<\/p>\n
Now, companies want to keep adding capacity and maintain control of it, but are increasingly structuring deals to reduce the impact on financial statements, which helps limit the risk they\u2019ll be seen as overexposed.<\/p>\n
The hyperscalers are starting to use so-called synthetic leases, which limit the liabilities that appear on their balance sheet but still allow
Tech giants would previously just write their own checks \u201cbecause they need to move quickly for first mover advantage,\u201d said Shell. \u201cAt some point, even for the biggest companies, financing at these levels has a meaningful impact on the balance sheet.\u201d<\/p>\n
As borrowing soars, credit markets are having to adapt to cope with the demand.<\/p>\n
\u201cThe size has now outstripped what you\u2019re going to realistically place into CMBS, ABS, and the private placement project bond market,\u201d said\u00a0Scott Wilcoxen, JPMorgan Chase & Co.\u2019s global head of digital infrastructure investment banking. \u201cIt\u2019s going to take all of them.\u201d\u00a0<\/p>\n
At least $175 billion of data-center related US credit deals have been struck this year so far, according to figures compiled by Bloomberg News. Oaktree\u2019s Marks questions the yields on the debt that\u2019s been sold by hyperscalers to finance the AI investments.\u00a0Play Video<\/p>\n
The spread is sometimes only about 100 basis points higher than US Treasuries, leaving the investing veteran wondering whether it\u2019s \u201cprudent to accept 30 years of technological uncertainty to make a fixed-income investment that yields little more than riskless debt?\u201d<\/p>\n
And not everyone is a fan of the design of some of the vehicles that investors are being asked to put money into.\u00a0<\/p>\n
\u201cWe\u2019ve seen master trust structures where the assets can be rotated every few years,\u201d said Michelle Russell-Dowe, co-head of private debt and credit alternatives at Schroders Capital. \u201cIt\u2019s hard to underwrite so we don\u2019t like those.\u201d<\/p>\n
Mentions of bubbles have seen regulators take an interest. The Bank of England is reviewing\u00a0lending to data centers\u00a0after growing concerned at the level of spending and financing.<\/p>\n
According to JPMorgan\u2019s Wilcoxen, one phrase that keeps popping up in the market to describe the vast expanse of financing being tapped is \u201ceverything everywhere all at once,\u201d a riff on the recent Oscar-winning movie.\u00a0<\/p>\n
\u201cThe amount of money that is chasing all this is extraordinary,\u201d he said.<\/p>\n<\/div>\n
#data #center #boom #sparks #fears #glut #lending #frenzy<\/p>\n","protected":false},"excerpt":{"rendered":"
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