Investors Warn Data Center SRTs Function as Asset Gathering

Compressed pricing on significant risk transfer, or SRT, transactions referencing data centers reflects asset gathering by large investors rather than a commensurate premium for risk, according to sources, who describe the current pipeline as a moral hazard reminiscent of pre-2008 credit market excess.

Recent examples of transactions include a repeat transaction from TD Bank, which references a $2 billion pool with a 0% to 8% first-loss tranche, which Blackstone bought, according to sources. Sources said that the transaction is particularly complex, incorporating ramp features and underlying asset classes beyond data centers, further complicating the risk assessment.

TD Bank and Blackstone did not respond to requests for comment.

BBVA recently completed a record €2 billion SRT referencing a project finance portfolio spanning digital infrastructure, renewable energy, transport infrastructure and other public services. The transaction releases close to 80% of the initial regulatory capital tied to the portfolio and combines a funded first-loss tranche with an unfunded mezzanine tranche.

BBVA confirmed that the portfolio has roughly 30% in technology, media and telecommunications, including fiber and towers alongside data centers, with a further 30% in renewables and the remainder split across energy and infrastructure projects. The bank also confirmed the portfolio is global, with the United States representing approximately 45% of the total exposure.

Although the transaction contained a relatively small data center portion, investors said that even a 30% concentration can be significant against a thin first-loss tranche, as a first-loss position does not require much underperformance in the data center-linked share of a pool to be eroded.

The ‘Asset-Gathering’ Loop

Sources described the typical buyer of data center SRTs as an investor already holding equity stakes in the underlying assets, which then also buys the SRT tranche referencing related exposure, functioning as a capital deployment exercise rather than genuine risk transfer.

Going even further, the sources compared the dynamic to the run-up to the 2008 financial crisis, when banks with excess cash and leverage capacity drove similarly aggressive risk-taking. They argued that for asset managers with more than $100 billion in assets under management, the economics of scale make fee generation, rather than risk-adjusted returns, the primary motivation.

A large share of the underlying loans in these portfolios is newly originated, according to sources, meaning SRT buyers can expect a clean first year of coupon payments before performance issues, if any, become apparent – a dynamic that, sources said, understates the risk being taken on.

Unresolved Operational Realities

Three structural risks remain unresolved industry-wide, according to sources: Uncertain and unequal access to power grid capacity, construction risk including labor shortages and cooling requirements, and the ability of offtakers or sponsors to exit lease commitments.

A sharper distinction exists within the data center category itself, sources said, as the bulk of exposure in these portfolios relates to AI-focused data centers. These carry materially more risk, spanning power supply, cooling and technology obsolescence, than cloud data centers, which sources compared to comparatively conventional warehouse-type assets.

Pricing Dislocation

Data center-specific SRTs are pricing in the high single-digits, between 7% and 9%, tighter than the broader infrastructure SRT range of 8% to 12%, sources say. That compression sits uneasily, in those investors’ view, against a set of underwriting concerns raised repeatedly: Development and construction-stage risk frequently makes up 50% to 70% of data center portfolios, with development alone accounting for 20% to 30% in some cases, sources say.

The dynamic points to a broader split emerging in the SRT market between deals motivated primarily by portfolio risk transfer and those driven by regulatory capital management, reigniting the industry debate over an expanded credit box. In the current environment, some banks have grown concerned about concentrated exposure to specific, rapidly growing sectors, data centers among them, and are turning to SRTs to address that risk directly, with capital relief a secondary benefit rather than the primary driver.

That distinction matters for how the market reads those transactions. Without granular issuer disclosure, investors’ estimates of data center concentration in bank SRTs may diverge meaningfully from the underlying composition of the referenced portfolios, sources say, making it difficult to assess from the outside whether a given transaction reflects genuine risk-driven hedging or an asset-gathering dynamic.