Key Takeaways | Private Credit Investing in the Digital Infrastructure Space

During this webinar, McDermott Partners Carl Fleming and Jeeseon Ahn and Power Sustainable Infrastructure Credit (PSIC) Managing Director Daniel Fein discussed the latest trends, opportunities and challenges surrounding private credit investing in the US digital infrastructure sector.

Top takeaways included:

• Demand for capital currently outstrips capital supply because of explosive growth in the global demand for digital infrastructure assets, such as data centers, and a financing profile that doesn’t fit neatly into corporate or real estate structures while being based on nontraditional credit matrixes.
• This demand has created opportunities for private credit providers, especially at the subordinated holding company (holdco) debt level, which offers returns on a risk-adjusted basis that currently exceeds returns seen in other infrastructure verticals. Digital infrastructure asset classes also have natural underlying, unlevered returns that can support the return level private credit providers are seeking.
• Data center asset leases executed with top-tier tech companies present attractive financing opportunities, but such leases can contain aggressive lease terms, including those relating to termination or assignment rights.
• From the private credit providers’ perspective, one mitigating factor for extensive termination rights is that the cost for a tenant to relocate to another site will be extremely high and sometimes not even possible. Therefore, such extensive termination rights will not likely be exercised.
• Mitigating factors for limitations on assignment rights that may restrict a lender’s right to enforce include large equity cushion that can stand behind the project and any construction or operational challenges and working with data center developers who have proven track records.
• Asset-backed security (ABS) markets have helped the growth of senior debt markets as they have provided an exit option for lenders. From a subordinated holdco lenders’ perspective, ABS allows for more leverage and flexibility given that it does not require amortization or cash sweeps. However, it remains to be seen whether the ABS market will be deep enough to meet the explosive demand for capital in the digital infrastructure market.