As a more than $20 billion borrowing frenzy to build out data centers descended on the junk-bond market this year, some issuers offered up a rare sweetener: an early cash payback.
Borrowers from cloud infrastructure firm Core Scientific Inc. to data center operator Cipher Digital Inc. are agreeing to return the billions they’ve borrowed at a much faster rate using a feature known as annual amortization, where a percentage of outstanding debt is repaid each year.
It’s an unusual structure in the junk-bond market, where investors typically collect coupon payments over the life of a security before that debt is refinanced or its principal is paid back upon maturity. But because data center debt is often tied to construction milestones, amortization can give investors more comfort when they commit.
The tool “offers protections given the up-front construction risk investors have to consider,” said David Kinsley, a senior portfolio manager at Impax Asset Management.
Core Scientific, which is developing six data centers to be occupied by CoreWeave Inc., sold $3.3 billion in junk bonds this week, agreeing to amortize the debt at 11.5% annually, according to people familiar with the transaction. Data center developer Edged Compute LLC raised $1.3 billion on Tuesday for facilities leased to CoreWeave and a subsidiary of China’s Alibaba Group Holding Ltd., with a 4.5% annual repayment.
Amortization is the latest deal sweetener for high-yield investors, who have quickly become critical to companies seeking financing for artificial intelligence infrastructure. While hyperscalers such as Amazon Inc. and Alphabet Inc. can sell investment-grade bonds, riskier junk-rated data center operators have turned to novel structures to win over investors.
Other data center borrowers have nabbed investment-grade tenants like Nvidia Corp., while some have secured support from Alphabet-owned Google. They’re also compensating investors with generous yields.
Core Scientific’s offering — discounted at 99.25 cents on the dollar — pays 7.933%, said the people familiar. Edged Compute’s bonds pay 7.5% in interest and a $5.7 billion deal involving Google-backed data centers priced at 6.25% last week. Similarly graded debt — near the top of the junk spectrum — offers an average yield of 5.83%, according to Bloomberg-compiled data.
Morgan Stanley has led all three of those deals. It also led Cipher’s bond sale in February and brought the first data center financing to the junk-bond market in October when TeraWulf Inc. raised $3.2 billion, also with a backstop from Google.
A representative for Morgan Stanley declined to comment. Representatives for CoreWeave, Alibaba, Core Scientific, Edged Compute and Cipher didn’t respond to a request for comment.
Counterparty Quality
Who a data center borrower is affiliated or partnered with has had a major impact on pricing. Edged Compute, for example, is paying 1.25 percentage points more in yield than the Google-backed bond, and that’s largely down to one of its tenants being CoreWeave, a sub-investment grade company that carries more risk.
Junk-bond buyers will accept less compensation when transactions are affiliated with investment-grade hyperscalers, while demanding a premium for deals that lack blue-chip support.
“This is still in its infancy,” Mike Best, a high-yield and senior loan portfolio manager at Barings, said about the data center debt market. “Portfolio managers and analysts need to understand the sector, create some differentiation and understand the different structures to better assess risk.”
Best said this early wave of offerings may end up being safer than similar high-yield transactions that come in the future. To date, the offerings that come with chunky amortization schedules are high quality by junk debt standards.
“If you’ve been around sectors that have built up, or grown, generally, the best deals come first and then we tend to push the risk spectrum in the future,” he said.
So far, bond buyers have been eager to buy data center debt — it makes up more than a fifth of this year’s $109 billion in high-yield issuance, according to data compiled by Bloomberg. But for borrowers who can’t access the investment-grade market, deal structures and the credit quality of their counterparties are critical to investors, according to David Saitowitz, the head of US liquid credit at ICG Plc.
“Data center buildouts are a great way to gain exposure to the AI megatrend,” he said. “At some point, we will likely overbuild. But we are not there yet.”
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