Banks are actively seeking investors, including insurance firms and private credit funds, to offload billions in loans connected to Oracle’s extensive data center initiatives.
Reports suggest that there are around $56 billion in construction loans linked to data centers, rated as investment grade due to future leases associated with a significant $300 billion agreement with OpenAI. This high rating is somewhat uncommon for infrastructure loans, enabling banks to appeal to a wider array of investors than they generally would for project financing.
Traditionally, banks focus on funding loans for projects like toll roads or airports, but the massive scale of recent data center ventures has surpassed typical demand. As a result, tech giants are on the lookout for alternative financing avenues.
“We’ve tapped into nearly every project finance bank out there, and their numbers are limited,” a banker involved in Oracle’s financing remarked. “To keep lending, banks must mitigate their risks.”
Getting an investment-grade rating for these loans is said to be “transformational,” as it unlocks new capital sources for institutional investors who previously viewed such unoperational assets as too risky. The banker also mentioned that talks with credit rating agencies started about two years ago.
The search for bond buyers is coming at a time when Big Tech companies are experiencing a wave of debt issuance. By 2030, nearly half of the largest borrowers in the U.S. investment-grade bond market are expected to be hyperscalers.
However, investor apprehensions are mounting regarding Oracle’s bold AI investments and the company’s considerable debt, as it tries to keep pace with rival tech firms. Also, on Monday, the software giant raised an additional $25 billion in the bond market, promising to uphold its investment-grade standing by reducing its debt load while also calming bond investors with plans to issue new shares.
The loans linked to data center construction encompass Oracle’s lease on $38 billion worth of facilities under development in Texas and Wisconsin, along with an $18 billion data center campus in New Mexico, supported by Blue Owl Capital. Both loans are currently being marketed to investors.
Christine Brodzinski, a partner at Norton Rose Fulbright, a firm focused on infrastructure project financing, noted that obtaining credit ratings in this sector has become “more common,” despite previously being quite rare during construction.
“Almost every large data center is seeking credit ratings now,” she pointed out.
Over a dozen banks are backing Oracle’s long-term lease agreements in these transactions, with rates approximately 2.5 percentage points higher than the secured overnight financing rate (SOFR).
According to a research note from TD Cowen, borrowing costs for new projects linked to Oracle are between 3 to 4.5 percentage points above SOFR, which is close to the junk bond level.
Some investors are contemplating whether to engage with two syndicated loans tied to Oracle, unsure if higher returns may emerge down the line.
As one U.S. project finance bank executive expressed, “That’s the dilemma: Are you prepared to invest in less favorable terms than what might come out in a couple of weeks?”
Another investor, having already committed to bonds backed by data center projects, noted that banks are feeling anxious about their expanding exposure in the AI lending surge and are trying to find ways to repay the debts that have been incurred.
This has led banks to offer higher-than-expected interest rates on these deals, as the investor added.
JPMorgan and MUFG, who are spearheading financing for the data center projects in Texas and Wisconsin, opted not to comment.
Stack Infrastructure, responsible for the New Mexico data center, confirmed that their deal is in the syndication phase and holds an investment-grade credit rating, stating, “Stack views the syndicate to progress as expected and on expected market conditions.”
Oracle also commented that the financing for the two data center projects was “secured at market standard rates, advanced to final syndication as scheduled, and aligns with investment-grade transactions.”
