Will hyperscalers need access to hyperscale funding?

It’s a pattern repeated so often to seem almost like a cliché. A new technological or regulatory breakthrough allows digital infrastructure operators to raise capital at vast scale. They build out their network based on optimistic demand predictions, and when that demand falls short, their eye-watering degree of leverage causes them to topple rapidly.

Sign up to receive our Weekly Newsletter for the latest project infrastructure finance updates, exclusive insights and benefits tailored for our subscribers.

In the late 1990s the mobile satellite operators (chief among them Iridium and Globalstar) rose and fell, followed in the next decade by competitive local exchange carriers and long-distance fibre operators such as Global Crossing. More recently, satellite broadband operators such as OneWeb have had to deal with investor scepticism or seek a deep-pocketed saviour.

The non-recourse debt market is usually one of the providers of competitive tension that allows those operators to raise large amounts of debt despite a short track record. The canny developer can play off project finance lenders against leveraged loan providers, high-yield investors, and real estate lenders to get the best terms. They would argue that they choose the most appropriate debt sources for the stage in their business model’s evolution, though many do not make it as far as stage two.

European fibre is the most recent asset class that has had lenders asking if it can make it to the next stage. In 2022, German and British fibre-to-the-home deployment made serious demands on infrastructure lenders. German FTTH volumes alone passed $8 billion in 2022. But the following year, European broadband finance volumes fell back sharply, and German lenders mused openly about whether they might have indulged too liberally.

And so, on cue, arrives the latest digital infrastructure boom, in data centres. Proximo has looked at some of the benchmark transactions in data, looking at potential constraints on development, but also the ability of data centre operators to create some competition between project debt and the asset-backed securities market, and improve distribution in new markets with sustainable labelling.

Source: Proximo Intelligence

Most recently, computing power providers (listed in the above chart as “Information technology”) are contemplating a move outside of the private credit realm and into the infrastructure debt market. They are not necessarily doing it because of constrained liquidity - the big beat of the space, CoreWeave, recently raised $7.5 billion from private credit lenders.

But the data centre operators serving the big hyperscalers - as opposed to the computing providers - are generally able to make smaller, but more frequent approaches to the bank market, and this speaks to project finance banks’ skillset and appetites. Single, or maybe double, assets with exposures to a single large hyperscaler customers.

Some of these assets are still extremely large. QTS, for instance, closed two single asset financings for projects in Richmond, Virginia, and Phoenix, Arizona, that each topped $1 billion. These are smaller tickets than have been seen in German fibre, but they generally feature much lower market risk. And deals in emerging markets are smaller still, even if they feature greater levels of political and economic risk. 

Region	Average 2024 data centre deal size ($m equivalent)
Asia	229
Europe	738
Latin America	210
Middle East and Africa	154
North America	855

There are opportunities for banks to over-extend themselves in data centres, particularly by supporting large leveraged acquisitions of portfolios, or by making loans with greater levels of market risks. Data centres’ demand for power was looking terrifying even before artificial intelligence applications forced operatotrs to revise those upwards.

But the data boom is one reason why transaction numbers increased by a much faster rate than volumes in digital infrastructure between 2022 and 2023, and why smaller deals also looks like continuing to be a trend in 2024.

Source: Proximo Intelligence

Proximo plans to expand on these observations when it presents its updated digital infrastructure finance market analysis at the Di² Summit 2024, which is taking place on 17th September in Munich

The session will examine debt sources, equity investors, and deal structures in digital infrastructure finance. It will also focus on key trends in data center financing, providing insights into regional differences and the current state of global debt markets.