Oracle Force Majeure Sparks Investor Anxiety Over Data Center Financing Documentation and Political Pushback

Oracle’s recent force majeure notice at Project Jupiter has forced data center investors to rethink the scope of risks associated with local municipalities pushing back on data centers and how force majeure provisions map across various deal documentations, sources say.

Oracle sent out a force majeure notice to the developer of “Project Jupiter,” a massive data center in New Mexico, which is facing delays. The force majeure allows Oracle to pay less rent while the project’s development remains delayed, Bloomberg reported last week. The project was financed with a $18 billion privately syndicated loan backed by Oracle payments made through a triple-net lease.
 

Although the force majeure clause may not be news for the market, any setback concerning a massive financing will have ripple effects in a growing asset class and is enough to create unease in the market, according to sources.

The debt tied to Project Jupiter was privately syndicated, but other deals where Oracle backs debt service through a triple net lease include RD Michigan Property Owner I LLC, which issued $14 billion senior secured notes in April that are rated BBB/Baa3. The bonds traded down to 91.41 today from 93.7 on Sept. 21 and traded down from par to the mid-90s in July, according to IHS Markit.

Data center financings do not often come to market with standard language that investors are familiar with, sources said. As the market continues to underwrite and digest these massive deals, documentation is likely to evolve, including the language around force majeure clauses.

Although every data center deal includes some form of a force majeure clause, some can be more friendly for the data center operator, and others are better for the lessee, according to sources.

Despite the negative noise, however, the primary market was open to data center deals last week

Digital Drive priced $1.085 billion of secured notes at a 8.875% coupon and 98.5 OID, equating to a yield of roughly 9.25% last week, Octus reported. Bonds traded up on the break to 99.25 on Sept. 23, according to MarketAxess, before ultimately falling back with the rest of the market to last trade at 96.6.

With the midterm elections coming up in November, local politicians have been focusing on data center regulations more than ever, sources say. In turn, investors have started focusing more on the favorability of a given data center’s location than ever before.

A given region’s hospitality to data centers will differ not only by state but often by city. While some investors believe that political obstacles will have longevity, others believe the pressure will ease after the midterms.

In Oracle’s case, New Mexico Democratic gubernatorial candidate Deb Haaland has said she would call for pausing new large-scale data center developments if elected. However, Haaland, the former U.S. secretary of the interior, has reportedly received donations from Oracle executives, and it remains to be seen if she would include Project Jupiter in the category of new data centers to be paused.

Various states have already moved to enforce frameworks restraining data center development. A recent example is Virginia Gov. Abigail Spanberger’s Sept. 18 framework, which she argues is designed to protect the state’s ratepayers, impose environmental standards and bolster community input on local approval processes.

On the federal level, the U.S. House of Representatives on Sept. 16 overwhelmingly approved legislation requiring state public utility commissions to consider strategies to make data center operators cover incremental electricity costs instead of passing those costs on to consumers, Octus legal analysts wrote. The bill hit a snag in the Senate, but the upper chamber could still revisit the legislation, possibly as soon as this week.

In the end, some sources say, these data centers will get built, but the spreads for the associated borrowing will widen based on counterparty risk rather than local government risk. Counterparties will really dictate where the spread will be, they added.

Oracle’s stock is down more than 11% this month, last trading at $133.1, giving the company a $402.47 billion market capitalization.

Oracle did not respond to a request for comment.