It’s not every day we write about debt in this newsletter, but tech investors are increasingly paying attention to credit as a growing source of funding for AI. One big question going into next year is whether lenders will have the stomach to continue backing massive data center projects. A recent debt offering from Blackstone-owned QTS, one of the largest U.S.-based data center developers, points to a potential solution: private credit.
It’s not every day we write about debt in this newsletter, but tech investors are increasingly paying attention to credit as a growing source of funding for AI. One big question going into next year is whether lenders will have the stomach to continue backing massive data center projects.
A recent debt offering from Blackstone-owned QTS, one of the largest U.S.-based data center developers, points to a potential solution: private credit.
QTS last month sold $1.75 billion in debt through what’s known as a 4(a)(2) private placement, said one person with direct knowledge of the deal. The offering was the second private deal by the company in a matter of months, following a $1.65 billion debt sale it completed in August.
Private credit deals like the one QTS completed are becoming more common as bankers work overtime to find the money for AI data centers, my sources tell me. Morgan Stanley in July predicted private credit would provide $800 billion of the $2.9 trillion required to build new data centers through 2028, more than twice as much as any other source of funding besides tech companies’ own cash flows.
As a consequence, expect companies like QTS and large private investors such as Apollo Global Management, which typically hold on to the debt instead of selling it to others, to directly negotiate more data center deals.
QTS, which Blackstone purchased for about $10 billion in 2021, has dozens of data centers in operation or under development in the U.S. and Europe for companies like Amazon. That includes megaprojects like the ones it’s building in Pennsylvania as part of a Blackstone pledge to invest more than $25 billion in the state.
Tech giants are increasingly eyeing private placements, too. On an earnings call Wednesday, Oracle’s principal financial officer, Doug Kehring, called out the private debt markets as one potential source of funding for the company’s data center expansion plans, along with banks and the public bond markets. (Oracle recently issued $18 billion in publicly traded bonds, and developers of data centers for the cloud and database company have borrowed at least $65 billion this year.)
Data center companies have traditionally taken out bank loans to fund the construction of their projects before tapping asset-backed securities markets. ABS usually falls under a classification known as 144A that allows investors to more easily trade the securities.
In contrast, offerings under rule 4(a)(2) are privately negotiated with investors and can't be traded, giving more flexibility to haggle over terms and make them attractive to large private lenders trying to generate above-market returns. That’s a big reason the private credit market has ballooned to $2 trillion by some estimates and continues to grow.
Details about private placements like the QTS offering, of course, generally aren’t disclosed to the public, and they’re not as liquid as ABS. What’s more, the credit ratings agencies generally don’t assess private credit, making it harder for investors to understand the risk.
That could make life difficult for regulators and investors if the data center boom suddenly goes sideways.
