Publications

Investors - FEBRUARY 21, 2019

A data center company pioneers asset-backed financing

by Drew Campbell

It is little wonder data centers have become a hot commodity among infrastructure investors. As data-storage device maker Seagate and market research firm IDC note in their joint report, Data Age 2025, the global datasphere will grow from 33 zettabytes in 2018 to 175 zettabytes by 2025. In other words, a mind-boggling amount of data.

Growth in data seems limitless, and demand for data center investment tracks this growth.

Capital flows to infrastructure investment also has been on the rise, and with that increase in funds the competition to find quality assets is growing, too. Data centers have become a popular recipient of investor capital of late.

Infrastructure investors like data center companies because of their potential to generate core-like cash yields. Similar to a power generator that needs customers to buy the power it generates, a data center needs customers to lease the storage and network services it offers. Data center operators with customers signed on to medium-to-long-term contracts are attractive to core investors.

One such company is Vantage Data Centers, which recently completed a first within the data center sector. Data Center Frontier reports, “This was the first time a data center company has used securitization financing, in which a company creates a security based on the creditworthiness of a specific pool of assets, rather than the entire company. In this case, Vantage was able to issue debt notes backed by cash flow from their operational data centers, which are leased by some of the world’s largest and most creditworthy companies.”

Typically, in the data center space, ratings agencies rate a company’s creditworthiness, rather than the financial health of certain assets.

“Until now, Digital Realty has been the only leading data center specialist with an investment-grade bond rating from S&P,” Data Center Frontier continues. “In a capital-intensive business like the data center industry, the cost of money matters. Lower rates translate into fatter profit margins, which can also provide companies with leeway to compete on pricing.”

As data grows, so grows demand for data centers, and if owners have new avenues for financing, including securitization backed by a pool of assets, these companies have more ways to fund their growth and operations, making them more attractive.

Infrastructure investors should take note of Vantage Data Centers’ latest financing. It could be the start of a new source of capital for data center companies.

 

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