With power hungry AI hyperscaler datacenters now being large buyers of power, the debt financing markets for the two sectors are beginning to converge.
Both sectors are characterised by upfront capex, followed by cashflows generated under long-term contracts - PPAs in the case of power, and datacenter leases in the case of hyperscaler datacenters. The counterparties in each case are typically large, creditworthy institutions.
Given the above, hyperscaler datacenters provide similar risk-return charateristics to some renewables projects.
However, hyperscaler datacenter debt financings can be superior in a number of ways:
- Datacenter lease revenue is highly stable and not reliant on variable weather conditions that drive revenue in renewables
- Broader financing sources with datacenter debt sitting in real estate, infrastructure or project finance lending books
- Datacenters as a sector have a much broader range of refinancing options including the ABS and CMBS securitisation markets, private placement and institutional debt investor markets, reducing refinancing risk. This is not the case for even utility scale renewable portfolios
- Datacenter supply is in a short market with no alternative sources of supply - apart from building more datacenters. This increases the value of the asset from a lien or residual value perspective. This contrasts with renewable assets - where more can be built quickly, and power supply can be backstopped by conventional generation sources
- Tax equity structures do not exist for datacenter financings, meaning debt is senior as opposed to second lien behind such structures which feature heavily in the renewables world
Lenders to both renewables and datacenter projects will have seen the two sectors converge and credit exposures doubling up, when the underlying credit of a renewable project is a hyperscaler datacenter. When comparing the relative value of renewable vs. datacenter financings, the latter is certainly attractive with a current pricing premium of 100-150bps for essentially taking on the same counterparty risk and superior credit quality characteristics noted above.
