Data centre boom offers acid test for Europe’s capital markets

Since the influential Draghi report on European Union competitiveness was published in September 2024, politicians have embarked upon a series of reforms to shake the bloc out of stagnation.

Many of the reforms identified by Mario Draghi, former ECB president and Italian prime minister, aim to boost GDP growth. Key among them are measures to invigorate capital markets into a so-called Savings and Investment Union, which includes a plan to revitalise securitization.

Securitization’s advocates have largely welcomed the proposals, but so far nothing has been put into practice as parliamentarians deliberate what the European Commission has recommended.

Whether the EU can step up to meet the extraordinary demand for data centres — Morgan Stanley estimates there is a $1.5tr financing gap worldwide for data centres up to 2028 — will provide a big test for this vision of its competitiveness.

Rising to the data centre challenge plays into each of three areas for action Draghi highlights in his report: “closing the innovation gap with the US and China, especially in advanced technologies”; “decarbonisation and competitiveness”; and “increasing security and reducing dependencies”.

The importance of data centres to the first objective is clear, while their huge energy demand makes them an important consideration in the second. The final area plays into the increasingly popular idea of data sovereignty and having control over key infrastructure by locating it domestically.

“One of the things we’ve often seen is a lot of the growth in Europe being driven by countries wanting their own digital infrastructure,” said Latham & Watkins partner Jeremiah Wagner at a GlobalCapital event in London in October. “That’s a big movement and I think that’s driven on a geopolitical basis.”

As an example, in October Italy recognised data centre developer Vantage as carrying out nationally strategic infrastructure investments that support the country’s economic agenda, one of only four companies to achieve the designation. It allows Vantage to gain expedited permission for its developments, but such designations are only part of the picture.

EU data centre developers still need access to affordable financing. In that respect, the bloc is coming from a standing start in each of the three phases of financing needed to develop a data centre.

First is the purchase of the site and gaining permission to build. Then comes the development and construction. Finally, there is the financing backed by the income the data centre generates.

“Where the meat of the financing is done is in that construction phase, because the meat of the [capital expenditure] is in that two-year span… from spade in the ground to when the data centre is complete and operating,” Barclays managing director Gordon Beck said at the same GlobalCapital event.

The project finance market is crucial during the construction phase, when data centre developers raise non-recourse debt from banks and/or institutional investors to pay for the building work.

Projects then typically operate for an initial period, after which the project finance debt is refinanced, often through the securitization or private placement markets.

“In a simplified picture, you need both bank debt and capital markets financing,” says Heiko Ludwig, global head of structured finance at Nord LB. “You need bank debt in the early part because it’s more flexible. Ideally, you’d then put it into the long-term arms of asset managers, pension funds and others… In my opinion, it should not be assumed that there is an endless future supply of very long-term bank debt, like 20 years and longer.”

Before even coming to that, however, developers need to obtain a site to build on. “When you’re speculatively purchasing land with the intent of acquiring power and permits, that’s probably best suited to something in the private credit world or a relatively structured facility and, frankly, a relatively higher risk facility versus the kind of cash flow debt financing that comes later in the piece,” said Beck at the GlobalCapital event.

Even some early construction work can require equity, or other more speculative capital, to line up tenancy contracts and close a project financing.

“For data centre developers, raising finance is a bit chicken and egg,” says Oliver Bradley, global head of digital infrastructure at Macquarie Capital. “Potential tenants want to know how much capacity you have in the next three to six months, which means that developers have to have begun construction, which requires a significant capital commitment.

“To get the tenancy contracts, you need to have financed and partially built your data centre, but to raise debt, you need to have the contracts.”

Given the country’s dominance in AI and data centre investment, the US is by far the largest project finance market for the sector.

“As of Q3 [2025], there is an estimated $70bn-$80bn of non-recourse debt raised to finance data centres in the US,” says Syed Usman Ahmed, head of digital infrastructure at Apterra Infrastructure Capital. “Four years ago the market was around $5bn. By year end, we expect at least $100bn of deals will have closed.”

Much of this non-recourse debt has been provided by banks. For example, two bank-funded US deals that closed in the latter half of this year are the $925m financing for Rowan Digital Infrastructure’s Bauxite hyperscale campus and Lambda’s $275m financing to enlarge its AI data centre portfolio.

The Rowan deal was led by SMBC, MUFG, Mizuho and Société Générale, while the Lambda deal was led and arranged by JP Morgan and syndicated to a wider lender group.

Vantage has also been in the market with a $38bn US data centre financing, which sources have confirmed is likely to be the largest ever project financing for any asset class.

Project finance remains a bank-led market, but institutional investors are increasingly backing greenfield data centre financings. In October, Blue Owl Capital issued $27.3bn of notes through Beignet Investor LLC, a project finance-style holding company, to invest in an 80% interest in a US data centre joint venture with Meta.

Europe is trailing the US in the development and financing of data centres, although transactions such as Bulk Infrastructure’s €410m financing for its N01 Data Center Campus in Norway have closed this year.

“If you look at the data centre capacity due to come online in the next year, it would be about three times larger in the US versus Europe,” says Jonathan Tweed, head of TMT finance at Société Générale in London. “Europe is lagging behind the US, with project financing volumes remaining similar between 2024 and 2025.”

Both land and power are more expensive in many European markets — each factor critical to data centre development — and Europe’s capital markets are less liquid. A GlobalCapital source notes that about €7bn of data centre project finance deals have closed in Europe this year, as of early November.

“I think that the hyperscale players have been focusing their attention on the US so far,” says Tweed. “The European data centre pipeline is, however, expected to grow rapidly next year with Sovereign AI and larger projects being announced throughout Europe in multiple locations.”

Liquid capital markets are essential to financing data centres, as most banks expect the construction debt they provide to be refinanced.

Securitization is widely seen as offering the most competitive balance between pricing and flexibility, but the gap between Europe and the US is even more stark when comparing the depth of their respective markets in the asset class. At the time GlobalCapital went to press, there had only ever been two data centre securitizations in Europe.

In the US, Vantage began the data centre ABS market for what the Securities and Exchange Commission deems qualified institutional buyers in 2018. QTS started a similar market in data centre CMBS in 2021.

In the time since those deals, the US CMBS market has swallowed about $20bn of paper, while the US ABS market has supported another $43bn, not including trades done in the 4(a)(2) private placement market.

In November, QTS tapped the CMBS market with a $3.46bn deal to refinance its 2021 trade of $3.2bn, likely the biggest CMBS deal of any type all year.

Data centre project financings usually run for five years and are ‘hard mini-perms’, which in project finance jargon means they require refinancing at or before maturity. Failure to refinance is treated as an event of default.

In addition, many banks have reduced their long-term infrastructure lending in the wake of reforms to bank capital requirements under Basel III.

As part of data centre financing, lenders must account for refinancing risk, which is intertwined with the risk that data centre tenants will not renew their contracts.

“The tenors of most project financings for data centres are shorter than the tenancy contracts,” says James Richards, an executive director in project finance at Standard Chartered. “The banks take refinancing risk, which is related to renewal risk for the tenancy contracts.”

Debt servicing depends on rental payments to data centres from their tenants. “When banks size the debt, they evaluate how much will be amortised at maturity and whether the contracts can be easily renewed or replaced,” says Richards.

“The amount of refinancing risk is partially determined by the level of renewal risk and the attractiveness of the site for alternative tenants, as new lenders will want to see long-term contracts in place.”

Several tenancy extensions are often required for full project debt amortisation, taking place in tandem with at least one refinancing.

Other crucial considerations for lenders are construction risk and tenant creditworthiness. Construction risk is sometimes mitigated by the developer making completion guarantees.

Lenders will also carefully evaluate tenants’ credit ratings and business models — a simpler process for hyperscalers such as Microsoft than for a newer company like, for example, CoreWeave.

Risks aside, there is immense appetite from project finance lenders to fund data centres, as the project pipeline is brimming and pricing on construction loans sits in the low-200bp to low-400bp range, according to market sources.

Top tier data centre ABS issuers in the US have priced deals with spreads on the senior notes of 140bp-160bp. In October, Compass, a dominant player in US data centre securitizations, priced a $326m single tranche, triple-A rated ABS at 125bp, yielding less than 5%.

The bottom line for many is that if the EU is going to get close to finding enough financing for data centres in terms of both scale and duration, securitization is going to have to step up. S&P expects annual data centre financing needs to rise to $173bn by 2028.

“At the moment, the bank market is working very well for sponsors, but if you add up all the numbers for future needs for new and existing infrastructure, you come to a total volume that most likely could not be financed in the traditional way with the existing bank capital in Europe,” says Nord LB’s Ludwig.

Europe does at least have the example of the US market to follow, where there is a thriving data centre ABS market.

Senior managing director at Guggenheim Partners, Matt Bissonette, a banker who has been involved in digital infrastructure financing for more than a decade, expects a record year for data centre securitization issuance in 2026. “It’s hard to put an exact number on it… but I could see a path towards $30bn across data centre securitization markets for stabilised assets alone,” he says.

“We’re seeing new investors participate, people focusing on bringing more capital into the digital infrastructure space, and I think that trend is only going to continue.”

Andrew Butville, director of ABS at MetLife Investment Management, believes the $13.8bn of US data centre ABS to have been priced by mid-November in 2025 could double in 2026.

“That’s based on the construction pipeline of data centres and project finance and bank finance that’s flowed into the sector,” he says.

There is plenty of evidence that investors will flock to the market to lap it up. If they cannot find paper at home, Bissonette expects more European investors to head to the US. “They’ve been limited because of regulation, but there is certainly demand from folks there,” he says.

“There is a very, very strong relative value in the securitized market versus the corporate market, especially for the highest quality assets and issuers. If you’re buying corporate bonds, you can see a pretty big pick-up versus the underlying hyperscalers.”

The relative value judgement will vary from buyer to buyer, however, and when they get into the market.

“We still like the space from a credit perspective, but spreads have really tightened to the point where we don’t see a lot of value in particular shelves,” says Butville. “We’ve sold some of our exposure because it’s just so much tighter than where we bought it.”

The question is whether Europe’s securitization market will be able to follow the US example.

“The need for data centre financing is a very good test [for Europe’s capital markets],” says Florence Coeroli, UK and global head of engineering at Société Générale. “You need issuers that are willing to go for it and test the market. For investors to put in the work to understand the asset class, they need to know there will be more transactions.”

Despite the scale of the challenge, European market sources are bullish. Matt Dunn, partner at Clifford Chance, says “the European ABS market for data centres is poised for significant growth” and could “become one of the cornerstones of digital infrastructure financing in Europe, mirroring the established success seen in the US”.

“We expect the data centre sector to grow,” agrees Kate Galustian, head of European ABS at BlackRock. “It’s early days, but it’s an exciting space. We want a broad investable universe.

“In an area like this, we would be extremely selective given the lack of historical data… In principle, the story is strong, but there are number of tech and operational factors to consider, as well the nascency of the market.”

That caution speaks to both the opportunity and the challenge for sponsors issuing European data centre securitizations. Sponsors want to deepen their access to capital, but the asset class is quite different to typical European securitization deals.

“There are US investors looking at the European market, but issuers that already do ABS in the US want to come to Europe to attract new investors,” says Coeroli. “They want the financing to be additive and not drawing liquidity away from the US market.

“At the same time, it’s good to have those US investors because it gives you certainty when you come to issue,” she says, considering they may already have good knowledge of and appetite for the asset class. “And these US-based investors may deploy specific euro liquidity pockets for the European deals.”

One of the most important questions for those involved with data centre securitizations is how to structure the deals to best tap into the different pools of liquidity. The best-case scenario is a structure that can bring in both ABS investors and those who like data centres as an asset but are less familiar with securitization.

“Data centres potentially bring new types of investors into the market, away from just traditional securitization investors, but it’s very early to try and quantify the depth of the market given there’s only been a couple of deals in Europe,” says Galustian.

Looking at those two deals is somewhat instructive, however. Both used a structure more similar to a US data centre ABS than a typical European ABS or CMBS, only issuing fixed rate notes. Such bonds are unusual in Europe’s securitization market.

“I wouldn’t be surprised to see more structural features coming into future deals targeting European investors,” says Henrik Nilsson, executive director at Natixis. “The European investor base would like to buy floating rate notes for example, but you need to work out how to do the hedging.”

The challenge with hedging is the long-dated nature of the assets. Data centre securitizations typically have strong incentives to call the deal at the anticipated repayment date (ARD) in the form of accelerated amortisation and step-up coupons. However, the ARD is normally five years away, but, if missed, the legal final maturity can be decades away, potentially making hedging very expensive.

Another big question is whether to mortgage the data centre and put that mortgage into a CMBS structure or securitize the cashflows from the lease directly in an ABS. Both are used in the US, but Vantage used ABS for both European deals.

“Sponsors are looking at a combination of US private placements and potentially an ABS into European markets,” says Nilsson. “The two deals from Vantage have really put [the ABS option] on the map and there’s definitely more to come.

“Sponsors want to diversify their funding sources as much as they can. The ABS route opens up new investors and then there’s the CMBS route as well. Securitization is needed to get the liquidity the market will need.”

A challenge with CMBS in Europe is that the market is far less liquid than in the US. There had been just 11 public deals by mid-November, according to GlobalCapital’s Asset Backed Monitor, and that is considered a bumper year for European CMBS.

“Ideally, we would like to see a bigger European CMBS market, but we are seeing more and more deals and, especially this year, the market has been quite active,” says Nilsson. “That is definitely helpful for data centre deals because there’s an overlap in the investor base.”

The other recurring problem for European securitization issuers is fragmented regulation. Each country has its own tax and insolvency laws, which makes it difficult to combine assets in different countries into one deal.

The challenge applies across asset classes, not just to data centres, and can make it hard for issuers to achieve the scale they need for a securitization.

Data centres, however, may have it better than some other asset classes because the assets are normally big enough to support a standalone securitization.

“The beauty and the difficulty of Europe is the number of different jurisdictions [versus the single, large market in the US],” says Coeroli. “We will need to consider ABS transactions country by country [instead of multi-country issuance], but that allows us to [target] deals that are the right size for the investors in a certain country.”

However, regulatory fragmentation could become a barrier that prevents issuers accessing more efficient funding structures as the market develops.

“In the US, there are master trusts of data centres,” says Nilsson. “In Europe, it’s a bit more tricky to implement because there are multiple jurisdictions. Given the size of the assets here, in most cases, it probably works to do it jurisdiction by jurisdiction. I think a master trust could be done, but there are questions on the legal side and you’d have to get everyone comfortable with the structure.”

Certainly, a solution to the EU’s fragmentation problem is not close at hand. “It takes time to create a solution that mitigates [the overreliance on bank debt],” says Nord LB’s Ludwig. “There isn’t really one answer… Maybe it takes a European solution of not thinking the unified market is one location but one set of rules. For example, if you have to deal with 16 different sets of insolvency laws, it becomes a very complicated consideration.”

Meanwhile, the US market develops apace. Not only are floating rate tranches under consideration, but there is a debate about extending the tenor of securitizations.

Head of structured products at Conning Asset Management, Michael Nowakowski, says he would not be surprised to see a 10-year ARD on a data centre deal in 2026 given that other types of securtization have done the same and that some of the biggest tenants of data centres — the hyperscalers like Alphabet and Meta — which are the underlying credits for the paper, have issued long-dated corporate bonds.

“We’re already seeing longer ARDs in some other spaces where they’re pushing seven and 10-year... so why not this next?” he says.

However, he urges for the pace to slow in 2026: “I hope the chorus of investors who are flagging a little bit of caution on this dampens some of the untethered growth that’s happening right now in this space.”

Bissonette of Guggenhiem Partners says it feels like the “early innings” in the development of digital infrastructure. “We have incredible demand from investors and clients that are bringing new sites online who want to access the structured markets.

“We’re trying to solve for a significant portion of a $1tr-plus need over the next five to 10 years.”

Additional reporting by Tom Hall