Issuance of securitized bonds backed by data centers has grown rapidly in recent years as developers turn to the structure to finance the infrastructure underpinning artificial intelligence. A Charles River analyst report estimates issuance has grown from $2.6 billion in 2020 to more than $14 billion annually by 2026.
The appeal for investors is straight forward: Asset-backed securities allow investors to access diversified portfolios of facilities rather than backing a single asset or tenant. Kevin Ooley, CFO at DataBank, a data center provider and operator, said the approach offers more predictable cash flow and lower operational risk.
The growth of artificial intelligence has increased interest in the supporting infrastructure. “We are the picks and shovels of the AI world,” Ooley said. “ABS is a different way for investors to play in an emerging area of critical growth.”
DataBank, which has issued several asset-backed securities, operates a portfolio of third-party managed colocation facilities where businesses rent capacity. One of the firm’s securitized master trusts includes about 35 assets and roughly 1,700 customers.
Ross McAdam, an investment manager at L&G Asset Management, America, said colocation data center ABS has provided a way to gain indirect exposure to a broad customer base without industry or geographic concentration.
“The underlying assets tend to be very diversified platforms, equally in terms of metropolitan areas that they operate in and the breadth of customers that those platforms interact with,” he said. “There could be 50 properties with thousands of high credit quality customers that create rent growth over time as contracts are negotiated.”
Because clients commit to long-term contracts, data center-backed securities can provide stable cash flows and attractive yields. Pension funds and insurance companies seeking long-duration assets have been among the most active buyers, Ooley said.
“The risk and rating adjusted returns for our insurance clients have been very attractive to date, and therefore we have spent more time looking into this space and selectively investing,” McAdam said.
Securitization allows these assets to be rated and incorporated into institutional portfolios with characteristics similar to investment-grade corporate debt. McAdam said this can help insurance companies match long-term liabilities.
Jie Liang, sector lead for esoteric ABS ratings at S&P Global Ratings, said issuance is likely to continue growing as the data center construction pipeline expands.
“It certainly appears that a lot of investors are buying into the growth story,” she said.
But much of that narrative is still being driven by issuers and intermediaries positioning the structure as a way to access AI-related growth. Liang added that technological obsolescence remains a risk. Improvements in chip efficiency may lead to a plateau in demand and potentially long-term decline, she said.
