High-Yield Bond Market Now Top Choice for Data Center Financing; Lenders Warn of Mispriced Risk

The corporate high-yield bond market has overtaken private credit and securitization as the fastest-growing source of capital for data centers, a panel of senior lenders and asset managers said at DealCatalyst’s Digital Infrastructure Finance 2.0 conference in New York last week.

Single-tenant, single-asset deals that once spent months in private origination are clearing the public corporate market in 24 to 48 hours, panelists said. That pulls data center financing beyond the large real estate investment trusts, or REITs, that historically issued corporate debt, and it arrives as hyperscalers float their own bonds, layering data center exposure on investors from several financing avenues.

Yondr Group, a London-based owner and operator of hyperscale data centers, lined up a roughly $715 million high-yield bond led by Goldman Sachs to fund global expansion, with pricing discussed in the high-6% to low-7% range, Octus recently reported. The unique structure of the financing carries a high loan-to-cost ratio and no amortization.

One panelist said that a combination of speed and leverage often misprices risk, noting that many investors underestimate the risk premium associated with how complex some construction projects for data centers can be. They added that there is a “strong hand policy” that forces participants to “get extra comfortable with risk.”

Another panelist highlighted the degree to which spreads have compressed across the board, noting that single-A data center asset-backed facilities have tightened from the low-200-basis-point range to roughly 150 bps to 160 bps.

The power grid, labor and a “not in my backyard,” or NIMBY, mindset, not financing, are the most significant bottlenecks facing the construction of new data centers, panelists said. That’s because grid capacity trails hyperscalers that are now hunting multi-gigawatt sites, electricians are scarce in key states, and community opposition to data center construction has hardened into a real threat. In regard to NIMBYism, panelists noted that small towns across the country are pushing for moratoriums that would prevent the construction of local data centers.

Panelists also warned of concentration risk. Exposure clusters among a few hyperscalers, and aggregating tenant risk across warehouse leases, hyperscale deals and corporate bonds can push investors past their allocation limits. The answer to concentration risk is structure, panelists said, listing downgrade triggers that speed up amortization and lease terms matched to bond tenors as remedies. “Price can also solve that,” one panelist added, citing greater risk-adjusted returns.

Though public financing is growing in popularity, private debt is still a significant source of capital for data centers. Octus reported that Crusoe obtained a $750 million credit facility from Brookfield’s infrastructure debt platform to fund its AI data center buildout, a sign that private debt platforms still anchor construction-stage capital even as public issuance expands.