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In our latest episode of Syndication Nation, US investment grade editor William Hoffman and senior leveraged finance reporter Sunny Oh discuss one of the hottest topics in corporate credit — data center bonds.
With billions of dollars of fresh debt hitting both high-grade and high-yield markets to finance the AI infrastructure buildout, investors are being asked to underwrite these project finance-type deals. That’s changing the job of the average tech credit analyst, forcing them to exercise a due diligence muscle they don’t typically use.
For more detail, read Will, Sunny, Yiwen and Dan’s latest piece discussing all the nuances and structures that lenders say can make or break one of these bond offerings. Find all our coverage of this new debt class at 9fin.com.
Have any feedback for us? Send a note to podcast@9fin.com. Thanks for listening!
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Sunny Oh
Hi! Welcome back to the 9fin Syndication Nation podcast. I'm Sunny Oh, leveraged finance reporter for 9fin, and we also have here William Hoffman, our investment grade editor. Welcome.
William Hoffman
Hey, glad to be back, Sunny. First time since the other week when we were talking about Paramount/Warner Bros. Discovery. A lot of that came true, we found out this week and reported on. So, go back and listen to that discussion. But tonight, I know we're talking about something different.
Sunny Oh
Yeah. But, like then, we're discussing one of the hottest topics crossing over into both markets, investment grade and high-yield right now. Data center bond issuance, right? Like, it's originally a phenomenon that was more in the high-yield market, and now we've seen it sort of creep into IG with these, like, huge multi-billion dollar deals. So, in your reporting, with a little help from me, you found out this creation of almost like a new asset class that's changing what the average tech credit analyst at an asset manager does. Walk us through what that looks like.
William Hoffman
Yeah, and with a lot of help from you, for the record. So, I mean, you know, this is a very hot asset class right now. I guess maybe to take a 10,000-foot view of the situation, right? The market is expecting companies to issue somewhere in the realm of $3 to $5 trillion to fund AI build-outs. Kind of like a crazy range there. Plus or minus $2 trillion.
But, you know, this is mainly coming from, like, the hyperscalers, right? This is your Amazon, Alphabet, Meta, Microsoft, and Oracle are the big, quote-unquote, hyperscalers. A term that didn't really exist, you know, a year ago. So, if you're going to really raise that kind of size this, $3 to $5 trillion, you really need to tap every corner of the market. So, that's IG bonds, that's high-yield bonds, that's leveraged loans, asset-backed financing, private credit, and then all things that we cover, but then also across all those currencies. So dollar, euro, sterling, Swiss franc, Canadian dollar, yen.
Amazon has tapped about half of those, and then Alphabet has tapped all of those currencies, just on their senior unsecured notes. But really what we're talking about with this specific kind of niche corner is these data center bonds, which are secured against the data centers themselves. They sort of sit off balance sheet. They're gone through these data center developers, some of which are former Bitcoin miners, you know.
Kind of a weird issuer that would not typically get sort of investment-grade ratings or even maybe even high-yield ratings. It would have some difficulty there, but because they have the backing of Google or an Alphabet or Microsoft...
So, these bonds are much different than your typical plain vanilla corporate bond, and over the last nine months or so, they've really stretched the role of the traditional tech analyst. Before, you might look at a giant, like, Apple, you know, like, you're a credit analyst, you're parsing through semiconductor supply chains or how that might be impacting margins and what the relative value is to a Google or an Alphabet, right? Kind of, like, basic...not basic. I don't want to diminish the role of a credit analyst, but, more standard analysis of a tech company, right?
But with these data center bonds that traditional playbook is thrown out the window. Today, if you're analyzing tech credit, your job looks more like commercial mortgage-backed securities analyst or a utility specialist, a project finance lawyer. All these roles rolled up into one. So, investment firms are really scrambling to unpack this massive influx of corporate bonds that are funding data center construction. And it's really an incredible shift because these deals used to live exclusively with project finance teams, right? This was specialty finance that was going on for specific deals.
And in that world, facilities aren't measured by square footage. It's measured by megawatts of power being delivered. When I measure a warehouse, I think of the size of it, but apparently it's more about the utility that's attached to this box. So, with all these capital needs AI data centers have really exploded so quickly. Developers are bypassing traditional channels, jumping straight into the larger, more liquid, high-yield, and corporate investment-grade bond markets.
Sunny Oh
Yeah. So, I got to be honest. Like, that's got to be a big change for what the order analyst might be doing in his day job, right? Instead of taking that higher-level view of the company's prospects of financials, it sounds like asset-level analysis.
William Hoffman
Exactly. And that level of project-level granularity is making a lot of corporate credit analysts work a due diligence muscle that they don't normally use. Tech analysts have become the point people because at the end of the construction period, really, this is Apple or Google or Microsoft risk, right?
Sunny Oh
Mmhmm.
William Hoffman
But until you get to that point, you're dealing with construction companies and lease payments and stuff that is not typically part of their world. So, it's really just a different muscle that they're flexing here.
Sunny Oh
Hmm. Interesting. Okay. And I guess, like, on my side of the high-yield we're looking at low-rate names, more of these Neocloud, specialized AI cloud providers, like Terawulf, Fluidstack, CoreWeave. But at the end of the day, it seems like the tenants that provide the underlying backing for these deals are still the Googles, Oracles, and the Microsofts of the world.
William Hoffman
Yeah. And it's really forced these tech analysts to create a new playbook for how to analyze them. A lot of them talked about a checklist that they have to make because they're not just sifting through the traditional tech things, right? They're looking, they happen to go through legal documents. A lot of them are using AI agents to work through some of those documents.
Sunny Oh
Mm-hmm.
William Hoffman
They're also bringing together teams from, you know, structured analysts and commercial real estate experts and legal teams. Like, all these investment firms have those teams and they're leaning on those different teams. But it's also how can they create a sort of one-stop checklist for how these things get measured?
Sunny Oh
And so, I think, you can check our article, but I think that our conversations on the street, we compile, this crazy long checklist that analysts are using to grade these bonds. And I think it spans five categories? Like, obviously, we can't go through every little question, but could you just give me a general rundown?
William Hoffman
Yeah, not to go through everything, but this was a common theme that kept coming up in all the conversations that we had for this article, which is quite a few, actually. Which is, what are the questions that people are asking through? So the big categories are construction, power, leases, structure, and fundamentals.
Just kind of briefly go over each of those. Like, construction, who is the construction company that's working on this data center? Are they reliable? Do they tend to have overruns? Are they IG rated? Are they high yield rated? So, those are some of the things that we're looking at there.
Power: This is a big one. These are essentially boxes, big boxes that are hooked up to utilities, right? There's not much going on inside of them besides that until you fill them with the tech, right? So, where's the power coming from? Is it on-grid? Is it off-grid? Can it be displaced? These are some of the things that people are asking there. And it's a huge part of that process.
Leases: We’ll get into kind of some of the details here. But the lease agreements are very different across a lot of these deals and makes a big difference about whether it's IG rated or high yield rated.
Structure: You're looking at some of them are amortizing, some of them are not. You know, are there exits for the guarantors? Where are the cash flows coming from?
And then, finally fundamentals. These are the questions that I think a lot of people are having at dinner tables, right? Is this an AI bubble? Are tech companies overspending on data centers? All those big questions kind of go into that bucket. And it's kind of why these decisions are centered around the tech analyst. Because once you make your way through the checklist and down in this fundamentals part, that's where the specialty lies.
Sunny Oh
Okay, interesting. So, I think we'll maybe start off with how this checklist might apply in, say, high yield. Just because that's where the market kind of took root. So, I think we tracked some of these deals, I think, from my understanding, there's 17 deals where the collateral is tied to data centers. The cash flows come from the lease payments. And I think 13 of those deals are rated. So, in high yield, that entire credit risk is driven by who the tenant or the lease guarantor is.
William Hoffman
Yeah, and the yields can tell, like, a very clear story here. The ratings can be quite different. But when you look at the yields, you can certainly tell which ones are lower, which ones are higher, where the risk is being placed.
Sunny Oh
Yeah, no, definitely seems the case. Like, I think we look at Applied Digital. I mean, I think that is the perfect example. They could price two separate bonds, one backed by CoreWeave, another backed by Oracle. Very different names. But at the end of the day, both bonds had a very similar double B rating.
However, I think the bond backed by CoreWeave, when it priced, came with a nine handle. While the one backed by Oracle priced at high sixes. So that's a massive yield difference, right? So, it shows exactly how much more risk investors are assigning to one of these newer cloud providers that came from the Bitcoin mining space like CoreWeave, compared to one of these kind of blue chip hyperscalers like Oracle, you know? I think one source told us deals with these hyperscalers they price the low 6% area. While non-hyperscaler deals could trade maybe, like, 200 basis points wide.
William Hoffman
Yeah, but the CoreWeave backed deals, right, those have kind of been tightening lately, haven't they?
Sunny Oh
Yeah, and that's fair. And I think that also speaks to this enormous demand for these kind of offerings. People cannot have enough of them. So, and I think that's also because we saw a recent headline where Jane Street, a quant, signed a massive $6 billion AI cloud agreement with CoreWeave. And I think that's, seeing these headlines, these massive contracts, they push these CoreWeave data center deals right into almost the 6% trading area now in the secondary. But the structural features do create divergences in how these deals trade. So, it's not like they're all trading at the same level. I think it's we might look at something like amortization schedules. So, if you look at Fleet Data Center, I think they had a $4 billion bond due in 2031. Only around 7.5% of that principal amortized by maturity.
So, I think at the end of the day, that leaves a $4.2 billion payment that needs to be refinanced at the end of the bond's life. So, you know, it's a huge amount.
William Hoffman
Yeah, it's a large amount, especially for, you know, a smaller provider that's not, like, one of these, like, hyperscalers that has the balance sheet.
Sunny Oh
For sure, for sure. And I think compare that to, say, like, Cipher Mining. I think there’s a $1.7 billion bond, 2030s. I think nearly half of that bond fully amortized by the time it matures. So, because of these slower amortization schedules on certain deals, I think a lot of the high-yield PMs might look at these structures as shorter-term two-year paper that will need to be refinanced, ultimately.
William Hoffman
Yeah, absolutely. And, like, that's the high-yield sector, right, where a lot of these deals have started. I think those are getting a little bit more standardized, right? I think when you switch over to investment grade we've kind of seen that those deals, frankly, just haven't had the standardization across the structures that the high-yield spaces had.
The biggest takeaway for corporate credit investors is that a high-quality tenant alone isn't enough to drag a project into investment grade. These structures typically need to have much tighter lease terms or an ironclad construction cost guarantee to get them over that IG hump.
Sunny Oh
Interesting. Okay. And I think you did a great case study in our reporting, right, comparing, Meridian Compute and Hut 8. I think those are the two newer issuers in the IG market?
William Hoffman
Right, yeah. Both deals featured Fluidstack as the tenant there, and both are backed by guarantees from Google. So, two data centers that have the backing of Google, essentially.
Sunny Oh
So, it should be like for like, almost.
William Hoffman
It should be like for like. And yet, Meridian is rated high-yield with mid-BB ratings, with Hut 8 getting investment grade at BBB minus lowest tranche, right? The difference was structural in de-risking. Hut 8 brought in a higher-quality construction partner that explicitly guaranteed a maximum cost to build. Meaning that, if they went over, the construction company was going to pick up anything and that was not going to fall on Hut 8 or Google, right?
Sunny Oh
Mm-hmm.
William Hoffman
So that boosted it up. And furthermore, Hut 8 guarantees consistent lease payments if Google were to leave. Or I guess Google is guaranteeing those lease payments. Whereas in that Meridian deal, the lease payments would step down. You're not guaranteeing those lease payments. So it's kind of a a good example that you can have similar deals that a few structural tweaks can really make a difference.
Sunny Oh
Interesting. And I think we have it recently that QTS deal backed by Microsoft. That was a big hot topic in the market. It seemed like it gave investors a big headache, and I think we saw that in the trading, too.
William Hoffman
Yeah we really did. That was a different deal because, mainly because it's not amortizing. They're not amortizing at all. You're basically relying on the fact that Microsoft, at the end of this lease term, is going to pick up the full cost of the bond.
Sunny Oh
Mm-hmm.
William Hoffman
Which is very atypical especially for a special financing construction bond. But because it's Microsoft, there's a lot going for it. So some of the counterweights. This would typically be a one-way ticket to high-yield if you were doing a non-amortizing bond. But a few things working for its favor.
One, the data center is already built. No construction risk. I don't know if it's running, but the construction is done. Second, it's backed by Microsoft, like we said. So, AAA-rated credit. I think the last AAA-rated credit. They haven't issued since 2017. There's a lot of demand pent up for Microsoft exposure. Stronger than treasuries, some would say.
And then finally, Moody's highlighted this in their report: tenant stickiness if this facility. It's a data center that's synchronized across Microsoft. It' two facilities, really. And it's part of their large language model business. It seems like it's sort of a flagship for them in the data center space. And you'd need something to really wrong to happen in the AI space for them to abandon this project.
Sunny Oh
Mm-hmm.
William Hoffman
So all of those things worked in its favor to give it IG ratings. Even so, without that amortization, investors are taking a long-term five to fifteen year bet that Microsoft will stay dedicated to AI data centers. And that's based on the premise that space that this will remain a cash cow for Microsoft. Can I get really technical for a second with you?
Sunny Oh
Yeah. Yeah.
William Hoffman
Cool. If you want to really dig into this, right? The rent, I believe there was a mechanism that Microsoft has to pay off all the rent payments to the end of its 20-year lease agreement, even if it decides to leave, right?
Sunny Oh
Mm-hmm.
William Hoffman
So depending on when Microsoft where to theoretically leave, that would allow those future rent payments, lease payments, to cover the principal or not. So if you're five years into the lease, and they decide to leave, then there's probably no issue because there's probably 15 years of rent payments that they would be guaranteed to pay out and that would cover the principal.
But if you get to the 10-year mark, this is only a 10-year bond, you have to refinance at the 10-year mark. And then, you're five years into the next refinancing and it's not amortized, then that next five year period wouldn't be enough to cover the principal. So this is kind of a long-term risk play. And who knows what's going to happen in 2041. That's 15 years out. That's the make or break point, and no one really knows what's going to happen at that stage.
Sunny Oh
Yeah. I'm sure. I'm sure a lot of the guys who are investing in these things won't be there to see what happens with these deals.
William Hoffman
Right, exactly.
Sunny Oh
Exactly. But so do you think it was worth it for these issuers to add these extra guarantees and restrictions on the debt to get these IG ratings?
William Hoffman
Yeah. I mean, I guess it depends on, you know, the perspective of the issue they were able to finance it at cheaper rates than some of the other deals in the high yield space or private credit space. The IG deals mostly priced in like the low 6% area or even like high 5% in the case of QTS. By comparison, most of the high yield deals were had coupons in the high 6% area all the way up to 9%. Although some of them have traded down lower than that since they've priced. But that jump from the upper rungs of high yield to the lower rungs of IG is only saving some issuers 50 basis points.
If you're Google, like you're not really sweating 50 basis points of interest expense, especially when it technically sits off balance sheet through these data center developers. It seems like most would prefer some flexibility in the event that AI is being like overhyped, and all this is just a bubble.
Sunny Oh
Interesting. OK. So what's wild to me is that some issuers are actively choosing to stay in the high yield market and pay up for the private market execution, even if they could aim for IG. I mean, I think you sort of explained it pretty well there. But I mean, we saw Meta and Oracle finance sales in the private markets and then syndicate a portion out of that into 144A debt. You know, it's kind of like this these interesting like hybrid public private offerings and they paid higher coupons of what they could have like, in theory, achieved in the public IG markets. What's going on there?
William Hoffman
Yeah. I mean, it's all about the premium for flexibility, right? So, you know, a good example is this Meta deal. It really kicked off these sorts of data center financings last year. It was a $27 billion private transaction, issued by Blue Owl because they were providing some equity in the data center as well, but then backed by an $18 billion anchor order from Pimco.
These structures were so new to the market last fall that they just opted to pay for the certainty of execution with a few select players that really knew the structure and they could really talk to and engage with. That deal was for a data center based in Louisiana. So they named the bond deal after the local beignet pastries. Still really confuses me every time I look it up because they use the French spelling instead of like the Americanized spelling. And it throws me off every time. So now Meta is actually reporting reportedly looking to fund its $13 billion Texas data center and a bond deal named after another local pastry, the sopapilla.
Sunny Oh
Well, what is that?
William Hoffman
It looks tasty. I've never had one, actually. Maybe should go to Texas and try it out. But, you know, I think that next deal will be like a really telling test of the market if they go back to private credit. Or is this a time to look to kind of the broadly syndicated market and see if they can get lower coupons now that the market is more aware of this kind of structure?
Sunny Oh
OK, yeah. And I think, based on our conversations, though, it seems like asset managers are getting frustrated because they want more standardization, but just give the nature of what they're financing. It might be a tough ask. And maybe you don't want it to because there's a bit of a structure in premium, too.
If it was very standardized, if it was all very plain vanilla, you wouldn't really get that yield. So it seems like every project has a unique leasing and power constraints and companies don't want to give up their like optionality just in case just to standardize something like they wouldn't really make sense for them. Right.
William Hoffman
Yeah. The investors want it and it would make going through these deals a lot easier. But if they eke out some extra flexibility or customize it to the specific site, they're going to do that. And that’s typical of what this is, which is project financing. That's why people are specialized in this sort of trading, because it's a very specialized sort of thing. And they're trying to bring it to a more standardized sort of way. And people are, feathers are a little bit ruffled from that, I suppose.
In the meantime, I think the pipeline is going to keep coming. It's absolutely roaring. In the high yield space we hear there's like another $6 billion of data center bonds coming down the pipeline. That's probably coming to the high yield bond market could come construction loan market. But either way, like a lot of these deals still in the pipeline. The Meta deal we just talked about is another multi-billion dollar deal. And issuers love the speed of the bond market over project financing or construction loan space. Deals can get executed in as little as six weeks, which is like twice as fast as a project financing deal.
There's also, we only looked at deals here that are backed by data centers, but there's also some other like weird maneuvers you could do. Like CoreWeave did a high yield deal that is tied to the GPUs that go into the data centers, right?
Which is not, it's spread out across different, you localities. And that's a different sort of function than the data center and the utility hookup to the box. But it also like a different mentality because how do GPUs perform over time? Do they degrade? Whereas like the utility hookup to a box is pretty standard for the most part.
So, yeah. Anyways, there's a lot of, there's going to be a lot of different variations of this kind of style. But this structure is like going to be very popular when you need to raise $3 to $5 trillion through 2030.
Sunny Oh
Yeah. No, no. And anecdotally, that CoreWeave deal, it did amazing in the term loan market just because there wasn't anything like it. And I think it just shows that there is just this avid demand for investors who just want to take advantage of this AI boom. You know, maybe some of their part of the portfolio doesn't benefit from this. And it seems like primarily when these things were first marketed, that was the appeal. You're going to have that, who knows what's going to happen in the world and in AI, but in case this becomes a big thing, you are going to benefit from it. It seems like that's the pitch, right?
William Hoffman
Yeah. And Google and Alphabet and all these hyperscalers, they've been sitting on mountains of cash for like years and investors have been, you know, begging them to issue more debt. They want exposure.
Sunny Oh
Yeah.
William Hoffman
And now they're getting it, you know?
Sunny Oh
And so you can't complain.
William Hoffman
You can't complain. And these data center deals are the highest yielding of them. They're frankly the lowest rated, highest yielding. And it's a great way to get high yield exposure to what are like ironclad, A-rated tech names. Yeah. So still early days of the market, at least from what people are telling us.
And we haven't achieved like a standard checklist of like what people should be asking. But, you know, I guess until then, investors will have to keep sifting through this complexity if they want to get a piece of this fast growing market. So that's all the time we have for today, but thanks for tuning in and thanks, Will. Hey, thanks for having me on, Sunny.
Sunny Oh
Yeah. So still early days of the market, at least from what people are telling us. And we haven't achieved a standard checklist of what people should be asking. But, you know, I guess until then, investors will have to keep sifting through this complexity if they want to get a piece of this fast growing market. So that's all the time we have for today, but thanks for tuning in and thanks, Will.
William Hoffman
Hey, thanks for having me on, Sunny.