US Vantage Data Centers has launched the first European commercial mortgage-backed security backed by a data centre, raising questions about how the assets are valued.
The deal, £600 million of debt backed by two data centres in Wales, is likely to spark a debate about whether these operational properties should be regarded as real estate. It has already divided the rating agencies in the US. Morningstar DBRS views them as warehouses, thus viewing the securities as CMBS. S&P, however, focuses more on the quality of the cashflow and the tenant and treats them as asset-backed securities.
It is more than an academic question. Rating data centres as ABS may lead to lower ratings. If a data centre, for example, has a large, dominant tenant, such as Amazon, Meta or Google, some will want to place a greater focus on the tenant and the likelihood of it staying. If that big tenant were to leave it would be more difficult to re-let the space as only a handful of companies would be able to fill the void.
“The key consideration is the sustainability of cash generation over the life of the rated debt and the extent to which the data center transaction is insulated from, or exposed to, key demand and supply risks that may affect cash flows available for debt service,” said rating agency Fitch in a research note two weeks ago.
Fitch uses three considerations to decide whether a data centre will be rated under its Infrastructure and Project Finance Rating Criteria, Corporates or Structured Finance rules. The rating agent will look at the business risk profile, debt structure finance and exposure to completion and construction risks.
At the end of last year, S&P launched a consultation to get feedback from the industry on proposed changes to the way it rates data centres, which could lead to around 40% of outstanding ratings in the US being lowered by an average of two notches.
S&P argued that, “given the evolving nature of the data centre industry, any long-term predictions about property value and contractual rates are too uncertain to rely on above a 'A' category stress".
Technology is developing so fast that it is difficult to predict when a data centre will be obsolete. The pandemic gave a massive boost to demand for large-scale data centres as more people started to work from home and shop online. More recently, there has been the rise of artificial intelligence. Will the power supply be sufficient for future demand?
In the presale report on the Vantage CMBS, Morningstar DBRS did not seem overly concerned about this.
“While there is substantial interest in and demand for data centres and the current stage of rapid growth is likely to continue over the short term, high-quality data centres managed by experienced operators typically exhibit low churn rates as it is time-consuming and costly for tenants to move their equipment elsewhere and switch data centre operators,” the rating agent said.
Despite the different approach, S&P and Morningstar DBRS arrived at a similar rating for the £600 million class A2-notes, with S&P rating them at A- and DBRS at A (low).
Whichever way you look at it, data centres will become increasingly important in the European securitisation market. The growing sector will need large funding. Knight Frank estimates that total aggregate supply of capacity across EMEA rose 24% last year. Investors and operators are rushing to meet demand. Last week, for example, Vantage announced its entry into Ireland with a €1 billion investment into a multi-phase data centre campus nine kilometres outside Dublin’s city centre. Meanwhile, Blackstone Group is in talks to acquire a site in Cambois, Blyth, Northumberland for £20 million where it plans to invest up to £10 billion in what would be its first major European data centre campus.