00:00:25:21 - 00:00:27:12 Hi, this is Jim Boland. 00:00:27:16 - 00:00:34:07 I work on the Leveraged Capital Markets desk at Mizuho, and this is Mizuho Markets Mindset. 00:00:34:09 - 00:00:38:21 With me today is Rahul Shah, who runs our project finance business at Mizuho, 00:00:38:21 - 00:00:44:19 and Nick Brice, who runs our high yield sales and trading business at Mizuho. 00:00:44:21 - 00:00:48:21 What we wanted to talk to you about today is the amount of activity that's going on 00:00:48:21 - 00:00:51:14 in the HPC data center market. 00:00:51:14 - 00:00:56:21 Rahul, as you've seen the expansion in the project finance business 00:00:56:21 - 00:01:01:21 around these data centers, you obviously had a very busy 2025, 00:01:01:21 - 00:01:04:10 what are you seeing in 2026? 00:01:04:10 - 00:01:07:15 You hear a lot of stories around – there's been an AI bubble – 00:01:07:15 - 00:01:12:15 there's a lot more financing coming in 2026 alone. 00:01:12:17 - 00:01:17:08 What are the sentiments you're seeing in the project finance market? 00:01:17:10 - 00:01:22:08 And what, if anything, are you seeing changing as a result of that? 00:01:22:08 - 00:01:23:12 Yeah, sure. Thanks, Jim. 00:01:23:12 - 00:01:28:04 So, 2025 was a record year for the project finance market by every measure. 00:01:28:06 - 00:01:32:15 There was over $225 billion of volume that came to market. 00:01:32:17 - 00:01:34:13 Three things really drove that. 00:01:34:15 - 00:01:36:06 Number one, renewables. 00:01:36:08 - 00:01:41:22 There was just a large push to renewables activity before the tax credit cliff really hits. 00:01:41:22 - 00:01:49:11 The second was LNG being back in play after being on the sideline and on pause for 2024. 00:01:49:13 - 00:01:54:12 But the third real driver and the biggest story to the market was data centers. 00:01:54:14 - 00:01:57:16 Deals grew to the point that the largest deal that came to market 00:01:57:16 - 00:02:01:16 and the largest project finance deal ever was a data center deal. 00:02:01:18 - 00:02:04:20 The number of lenders active in the market grew, 00:02:04:20 - 00:02:07:23 the number of deals that came to market grew, deal size grew. 00:02:08:00 - 00:02:15:11 Everything's just grown to, just, numbers that no one expected seeing 12, 24, 36 months ago. 00:02:15:13 - 00:02:19:02 So with that backdrop and thinking about what we see going forward, 00:02:19:02 - 00:02:22:15 one absolute issue or challenge for a lot of 00:02:22:15 - 00:02:26:06 the market right now is really just hitting the point of saturation. 00:02:26:08 - 00:02:28:22 There's never been this much volume before. 00:02:29:00 - 00:02:32:11 And if you think about many of the project finance players, 00:02:32:11 - 00:02:36:17 some of them, like us, are highly diversified, where we've been active in renewables, 00:02:36:17 - 00:02:39:07 active in energy, active in data centers. 00:02:39:09 - 00:02:42:22 A lot of the other players out there are only playing in data centers. 00:02:43:00 - 00:02:47:05 And so they're really grappling with concentration limits really to a subset of 00:02:47:05 - 00:02:53:01 hyperscale tenants who don't have all the same rating profile and some are stronger than others. 00:02:53:01 - 00:02:57:05 And so, looking into 2026, the pipeline is growing. 00:02:57:10 - 00:02:59:22 We expect to see a lot more volume, 00:02:59:22 - 00:03:06:05 but the supply of dollars available from banks is definitely not growing at the same clip. 00:03:06:07 - 00:03:11:02 And so what we have started to see and continue to expect to see next year 00:03:11:02 - 00:03:13:23 will be really alternative forms of capital. 00:03:14:01 - 00:03:18:18 So, going beyond the traditional bank market, reaching into the capital markets, 00:03:18:18 - 00:03:21:06 reaching into other pockets of capital that are out there 00:03:21:06 - 00:03:24:04 to keep up with the amount of supply that's coming through. 00:03:24:06 - 00:03:30:13 Now you've seen some migration into the private placement market, into the ABS market. 00:03:30:15 - 00:03:37:00 At this stage, at least at the construction phase, is that normal from what you're seeing historically? 00:03:37:00 - 00:03:43:13 It is and it's a good point because so much of what the banks are really focused on is capital recycling. 00:03:43:15 - 00:03:49:16 So, banks will come into a deal, they want to see that deal or that asset stabilized or completed, 00:03:49:16 - 00:03:56:19 and at that point, that deal gets refinanced in the ABS market, the private placement market. 00:03:56:21 - 00:03:58:02 If you take a step back and look at the 00:03:58:02 - 00:04:02:21 amount of volume that we've seen over the past 12 months, 24 months, 36 months, 00:04:02:21 - 00:04:07:06 that recycling really hasn't hit the way that a lot of us want to see, 00:04:07:06 - 00:04:11:03 and it's not because projects are having issues or facing challenges as 00:04:11:03 - 00:04:16:18 much as it is that there's been a really steep ramp, and while those markets are open, 00:04:16:18 - 00:04:21:03 there's just such a stronger pace of new deals coming to market than deals, 00:04:21:03 - 00:04:24:03 or new deals coming to market than those deals being taken out. 00:04:24:06 - 00:04:24:20 Got it. 00:04:24:21 - 00:04:28:19 Now I'm going to hit Nick on this in a moment, but I wonder if you could tell us, 00:04:28:19 - 00:04:35:22 we've seen some, I'd say, call them non-traditional type developers that have a history in the Bitcoin market 00:04:35:22 - 00:04:38:15 that have access to the high yield market. 00:04:38:19 - 00:04:43:01 Was that a selection of efficiency and speed to market, 00:04:43:01 - 00:04:46:23 or did they look toward the project finance market 00:04:46:23 - 00:04:49:19 and just passed and opted to go into the high yield market? 00:04:49:23 - 00:04:50:17 Yeah, it's a good question. 00:04:50:17 - 00:04:54:15 We've spent a lot of time on those situations, and the answer is both. 00:04:54:18 - 00:04:58:10 If you think about the traditional project finance market, 00:04:58:10 - 00:05:02:20 we look for investment grade offtakes, investment grade contracts 00:05:02:20 - 00:05:06:01 that are really underpinning the credit profile of those deals, 00:05:06:01 - 00:05:10:10 and so when you think about the players that you just mentioned with that profile, 00:05:10:10 - 00:05:16:17 they often don't meet or fit the mold of what the traditional bank market is really willing to do. 00:05:16:19 - 00:05:20:08 Now, there is voracious appetite in the private credit market, 00:05:20:08 - 00:05:24:04 and so, many of those issuers have also 00:05:24:04 - 00:05:28:02 tried going down that path, but ultimately steered to the capital markets 00:05:28:02 - 00:05:31:07 just because it felt like a more efficient execution for them. 00:05:31:09 - 00:05:32:00 Got it. 00:05:32:03 - 00:05:36:23 And Nick, on that point, just in the fourth quarter alone, 00:05:36:23 - 00:05:43:01 you saw just shy of $10 billion coming from that universe. 00:05:43:01 - 00:05:46:17 What's been the reception so far from high yield investors? 00:05:46:17 - 00:05:48:01 The reception has been great. 00:05:48:01 - 00:05:54:02 Our clients, they love the ability to put net new money to work, 00:05:54:02 - 00:06:02:17 and data center financings have been and will continue to be the biggest source of net supply 00:06:02:17 - 00:06:09:22 for the credit markets, and so our investors are excited to have new credits to look at 00:06:09:22 - 00:06:16:22 and to gain exposure to artificial intelligence and high-performance compute data centers. 00:06:17:00 - 00:06:21:08 Now, construction, historically, it's been done before in high yield, 00:06:21:08 - 00:06:25:00 a ton of construction financing coming into the high yield market. 00:06:25:00 - 00:06:28:06 How do you think that's going to be received? 00:06:28:06 - 00:06:35:19 So far, it's been received well, mostly because of the tenant quality. 00:06:35:21 - 00:06:40:16 For the most part, these are hyperscaler IG counterparties. 00:06:40:16 - 00:06:44:06 We’ve taken a lot of the characteristics of Rahul's market with 00:06:44:06 - 00:06:50:12 amortization, excess cash sweeps, and tenant backstops, and security, 00:06:50:12 - 00:06:57:06 five-year tenors and BB ratings to make sure our investors can get 00:06:57:06 - 00:07:01:11 comfortable with the construction risk and some of the execution risk 00:07:01:11 - 00:07:04:19 around a relatively new asset class. 00:07:04:19 - 00:07:08:20 And any points of caution you're seeing with investors? 00:07:08:20 - 00:07:11:06 Yes. Similar to what's been mentioned, 00:07:11:06 - 00:07:20:09 but construction risk, access to power, and operator and tenant quality. 00:07:20:11 - 00:07:29:05 Standing up and operating an HPC data center is different than 00:07:29:05 - 00:07:35:04 your legacy data centers that were built in the last couple of decades. 00:07:35:06 - 00:07:39:15 So, certainly teams with more experience are preferred. 00:07:39:20 - 00:07:40:04 Got it. 00:07:40:04 - 00:07:44:02 And when you think about the high yield market last year being about 00:07:44:02 - 00:07:49:21 $325 billion in total volume, and you hear numbers thrown around anywhere from $40 00:07:49:21 - 00:07:55:23 to $60 billion of potential data center financings, and that's just data centers 00:07:55:23 - 00:08:00:02 themselves away from the other parts of the value chain, whether it's the GPU 00:08:00:02 - 00:08:04:16 financings or just the power itself, how do you think the high yield market's 00:08:04:16 - 00:08:05:17 going to absorb that? 00:08:05:17 - 00:08:08:05 I think there'll be the demand there for it. 00:08:08:07 - 00:08:13:19 I think the credit market in general right now is very healthy. 00:08:13:21 - 00:08:17:23 The recent deals multiple times oversubscribed, 00:08:17:23 - 00:08:24:05 and we have all of our blue-chip long-only asset managers, insurance companies, pension funds 00:08:24:05 - 00:08:29:03 and hedge funds are all important participants 00:08:29:03 - 00:08:35:00 and have bought sizable portions of the deals that have come to market so far. 00:08:35:00 - 00:08:40:20 And as long as we have the characteristics, the structural enhancements that we talked about 00:08:40:20 - 00:08:48:16 in place, and the tenant quality is there, then there should be plenty of demand. 00:08:48:16 - 00:08:54:03 So would you say that the majority of these books are broad-based investors, 00:08:54:03 - 00:08:58:14 not just segmented towards hedge funds or just traditional high yield? 00:08:58:17 - 00:09:03:00 It depends a little bit on the quality of the deal. 00:09:03:03 - 00:09:12:07 So far, we've seen mostly BB, seven-handle, high-quality deals come to market. 00:09:12:09 - 00:09:18:06 And in that ballpark, you can attract 00:09:18:06 - 00:09:23:15 investors from across the spectrum and you should have plenty of demand. 00:09:23:20 - 00:09:24:05 Got it. 00:09:24:05 - 00:09:30:02 And as you get away from the hyperscaler community into sort of lower-quality guys, 00:09:30:02 - 00:09:33:18 how do you think the market reacts there? 00:09:33:20 - 00:09:35:16 That'll be the real test. 00:09:35:18 - 00:09:38:20 That's probably the open-ended question at this point. 00:09:38:20 - 00:09:42:03 You'll probably have to get a little more creative with the structural enhancements, 00:09:42:03 - 00:09:51:07 because when we start talking about higher-risk investments in the AI ecosystem, 00:09:51:07 - 00:09:57:10 credit is not exactly how you want to express those types of trades. 00:09:57:10 - 00:10:02:06 You want more equity-like returns for that type of risk. 00:10:02:08 - 00:10:08:03 And high yield bonds, unless they come very wide with bells and whistles, 00:10:08:03 - 00:10:10:17 don't usually offer equity-like returns. 00:10:10:17 - 00:10:11:17 Got it. 00:10:11:19 - 00:10:13:18 Going back to Rahul, what can you tell us about 2026, your pipeline? 00:10:13:18 - 00:10:18:07 Going back to Rahul, what can you tell us about 2026, your pipeline? 00:10:18:09 - 00:10:19:17 Is it manageable? 00:10:19:21 - 00:10:21:15 Are you turning business away? 00:10:21:15 - 00:10:22:17 Yeah, the pipeline's growing. 00:10:22:17 - 00:10:30:00 I continue to be surprised by just the intensity of inbounds for new projects and opportunities. 00:10:30:02 - 00:10:34:11 So I take a step back, I think about AI and just data centers overall. 00:10:34:13 - 00:10:37:20 No doubt, volume will be up year over year. 00:10:37:22 - 00:10:43:07 Whether or not the banks can keep up with that volume, I think the answer is probably not. 00:10:43:07 - 00:10:47:21 I think we will have to explore alternatives to the bank market, 00:10:47:21 - 00:10:52:05 just because there's so much supply out there, based on what we see coming. 00:10:52:07 - 00:10:58:14 From a structure perspective, these deals have really stayed at pricing terms. 00:10:58:17 - 00:11:00:11 Nothing has really changed. 00:11:00:12 - 00:11:05:13 Because there's too much supply for anyone to really try to get too aggressive on things. 00:11:05:14 - 00:11:07:09 And I think that'll stay the same as well. 00:11:07:09 - 00:11:13:19 I think about this space two years ago, many people thought of it as "there's winners and losers". 00:11:13:19 - 00:11:15:17 The winners are the folks active in data centers. 00:11:15:20 - 00:11:19:00 The losers are the folks who are watching it from the sideline. 00:11:19:02 - 00:11:21:23 And when I think about the space today, 00:11:21:23 - 00:11:25:21 I think there will be winners and losers who are active in data centers. 00:11:25:23 - 00:11:29:11 What I mean by that is some projects will hit delays. 00:11:29:13 - 00:11:34:01 There will be construction issues, there will be supply chain issues, things like that. 00:11:34:03 - 00:11:38:00 The underlying credit profiles are strong, and so the structures are tight. 00:11:38:02 - 00:11:44:18 But I think we will see delays on certain projects, and that's just ordinary course for project finance. 00:11:44:18 - 00:11:49:08 And how do you think about the operator, developer, lessor, 00:11:49:08 - 00:11:52:16 and your decision making around which deals you chase? 00:11:52:18 - 00:11:56:08 Proven track record goes a long way. 00:11:56:10 - 00:12:03:10 Having a demonstrated ability to work well with a number of hyperscalers, 00:12:03:10 - 00:12:08:02 longstanding relationships, things like that matter. 00:12:08:02 - 00:12:12:00 Because when things go sideways or when you hit challenges, 00:12:12:00 - 00:12:15:20 the strength of those relationships I think really make the difference in projects. 00:12:15:22 - 00:12:20:12 And so that has always been a part of our calculus in terms of deal selection. 00:12:20:14 - 00:12:27:02 And I think the market in many ways is starting to think about that the same way. 00:12:27:04 - 00:12:31:00 I think about the last 18 months and a lot of new entrants in the space 00:12:31:00 - 00:12:36:03 were trying to credentialize themselves to be able to build some creds, 00:12:36:03 - 00:12:41:08 show that they're able to deliver on these deals, that they can structure them. 00:12:41:10 - 00:12:44:01 There's a lot of new players who have been able to do that. 00:12:44:01 - 00:12:47:13 And I think we'll see more discipline around deal selection going forward 00:12:47:13 - 00:12:50:03 to capture exactly those factors. 00:12:50:03 - 00:12:55:09 When you look at the private credit community, a lot of them manage insurance company money 00:12:55:09 - 00:12:58:22 who can be very competitive from a pricing standpoint. 00:12:59:00 - 00:13:04:22 Are they winning the battle, losing the battle when you guys compete against them? 00:13:05:00 - 00:13:07:14 Because there's so much supply right now, 00:13:07:14 - 00:13:12:13 it hasn't been a matter of us losing to those players or those players losing to us. 00:13:12:15 - 00:13:15:17 It feels like there's enough for everyone. 00:13:15:19 - 00:13:17:18 Might that change over time? 00:13:17:20 - 00:13:18:18 Perhaps. 00:13:18:23 - 00:13:22:17 Does that change in 2026 based on what we see in the pipeline so far? 00:13:22:17 - 00:13:23:19 I don't think so. 00:13:23:19 - 00:13:24:10 Okay, great. 00:13:24:15 - 00:13:28:00 With that, I'd like to wrap it up and thank you for joining us today. 00:13:28:02 - 00:13:31:01 And I'd like to thank Rahul Shah and Nick Brice 00:13:31:01 - 00:13:36:15 for joining us for this very important discussion on the data center market. 00:13:36:17 - 00:13:37:01 Thank you.