Financing and Debt Issuance for Data Center Developers: Insights from Womble Attorneys

Data center developers face a myriad of challenges when it comes to financing and debt issuance. In this episode, Barlow Keener delves into the intricacies of these topics with David Beckstead and Art Howson. The conversation covers essential aspects such as project finance models, revenue streams, and risk management. This comprehensive discussion aims to provide valuable insights for data center developers looking to enhance their financial strategies.

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Financing and Debt Issuance for Data Center Developers: Insights from Womble Attorneys

Transcript

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Data center developers face a myriad of challenges when it comes to financing and debt issuance. In this episode, Barlow Keener delves into the intricacies of these topics with David Beckstead and Arthausen. The conversation covers essential aspects such as project finance models, revenue streams, and risk management. This comprehensive discussion aims to provide valuable insights for data center developers looking to enhance their financial strategies. Now onto the episode.

Barlow Keener: 

Hello, everyone, and thank you for joining. I'm Barlow Keener, and today, I'm sitting down with Womble attorneys David Beckstead and Art Hausen to discuss data center financing. David, let's start with you. What are the primary considerations for data center developers when it comes to debt financing?

David Beckstead:

So when considering debt financing for data centers, it's crucial to understand that lenders are primarily interested in the project's revenue streams and risk profile. They look for an acceptable return given the risk involved and this includes examining co-location agreements, tenancy agreements, and overall financial model. Lenders scrutinize about deck's utility supply including power and water and the potential impact of delays or downtime on revenue. Additionally, lenders are interested in the project's location, proximity to power and wire infrastructure, and the availability of fiber cables

Barlow Keener: 

And how do lenders assess the risk associated with data center projects?

David Beckstead:

Lenders assess risk by evaluating various factors such as the project's revenue streams, the creditworthiness of tenants, and the terms of service level agreements. Lenders are particularly interested in the service level agreements, often referred to as SLAs, which outline minimum downtime and construction delay provisions

Barlow Keener: 

Can you explain the concept of limited recourse financing in the context of data

David Beckstead:

Absolutely. So limited recourse financing means that the data center project's assets are used to secure the lending and the revenue streams are what lenders rely on for repayment. This model is common in project finance and is particularly relevant for data centers due to their unique infrastructure requirements

Barlow Keener: 

And what role do green loan principles play in data center financing?

David Beckstead:

So green loan principles such as those issued by the Loan Market Association and the Asia Pacific Loan Market Association and the Loan Syndications & Trading Association are increasingly important in data center financing. These principles require data center operators to maintain certain energy and environmental design standards, which can make the project more attractive to lenders. Data center operators are also expected to adhere to standards such as LEED certification which focuses on energy efficiency and environmental sustainability

Barlow Keener: 

So moving on beyond green loan principles, Art, how do lenders approach the construction phase of data center projects?

Art Howson:

Well, during the construction phase, lenders often require completion guarantees and financial support from sponsors, including minimum equity contribution requirements for the project. From a due diligence perspective, they typically review the project construction schedule closely in comparison with terms of the project's revenue contract and structure the loan documents to mitigate the risk of potential delays or cost overruns. Lenders may also require reserve to maintain funds on deposit to cover loan payments or other project costs.

Barlow Keener: 

And what are the key elements of a colocation agreement that lenders focus

Art Howson:

Lenders focus on the terms of the data center's revenue contracts, including the length of the lease, early termination risks, and the creditworthiness of tenants. They typically seek the ability to cure defaults under key project contracts to protect their interests in case of default and ensure that the project's revenue stream remains intact. And they will wanna confirm that the tenancy agreements can be assigned to a new project owner if necessary, given the importance of those contracts as collateral for the

Barlow Keener: 

So then, how do lenders evaluate the supply of utilities when it comes to data center projects?

David Beckstead:

So lenders evaluate the supplied utilities by examining the project's power and water infrastructure. Lenders to data centers today are more than ever particularly interested in how power is secured, whether through dedicated power purchase agreements or PPAs or other arrangements as this of critical for data center operations. Lenders also assess the project's proximity to power plants and water sources to ensure reliable utility supply

Barlow Keener: 

And what are the common risk allocation strategies when it comes to data center financing?

Art Howson:

Common risk allocation strategies include limitations on the amount of debt that can be advanced in relation to equity contributions or to the projected value of the project. Lenders may also require the project to have payment and performance bonds in place with the key construction contractors and equipment suppliers to mitigate risks outside of the borrower's direct control.

Barlow Keener:  

In conclusion, financing and debt issuance for data center developers require a thorough understanding of various financial models, risk assessment strategies, and contractual terms. By focusing on revenue streams, utility supply, and greenbone principles, data center developers can enhance their financial strategies and secure the necessary funding for their projects. The insights provided by David and Art offer valuable guidance for navigating the complexities of data center As the data center industry continues to evolve, staying informed about these critical aspects will be essential for success. Thank you so much for joining us today on Womble Perspectives.

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