Issuance in the European data centre securitization market is set to accelerate this year, after only one deal in 2024, followed by a deal and a tap in 2025, all from Vantage. This year is off to good start already as Yondr markets its first transaction this week, with plans to price it next week.
Multiple sources told GlobalCapital they are confident there will be at least two more deals this year, with some predicting as many as another six. The pickup in activity is establishing the asset class and building a template for issuance.
In most respects, Yondr’s deal looks very similar to the two Vantage deals. It is offering a single fixed rate tranche, rated AA by Fitch and AA (low) by Morningstar DBRS. It has an anticipated repayment date (ARD) of February 2031 and legal final maturity in 2056.
“I would say [Yondr’s deal] has similar structure to the UK deal from Vantage in 2024, with the long post-ARD structure,” said Mirco Iacobucci, head of EU and APAC commercial real estate and digital infrastructure debt rating at Morningstar DBRS. “Again, it’s not a direct mortgage, but there’s a valid and registered interest in the collateral.”
As with the Vantage deals, Yondr’s is also green bond. Barclays, which was on both Vantage deals, is an arranger with Goldman Sachs. ABN Amro, Deutsche Bank, Nomura and Société Générale are co-managers.
Born in the USA
The template for issuance is modelled on the US market.
In Yondr’s case there is a debt issuer called Ramsgate DC Holdings UK 1 Sarl, which has a PropCo under it leasing the data centres to a single tenant — undisclosed, but rated AA+ or higher.
The PropCo has a management agreement with Yondr to operate the data centre. The debt issuer makes interest only payments to noteholders up to the ARD. Post-ARD, lease payments are used to pay down the principal.
The deals are also structured under Reg S and 144A, opening them up to US investors. US money is playing a significant role in the market. In the first Vantage deal in 2024 for example, 36.3% went to US buyers.
“The structure diagram [of European data centre deals] is based on the same principles that the US market uses,” said Christian Lambie, partner at law firm Norton Rose Fulbright. “There are ways deals could be structured to look more like normal European deals, but as long as Europe is trying to sell paper to US investors, there will be a push to keep the deals looking familiar to them.”
It seems important to sponsors to have the certainty of execution US money brings, but part of the point of issuing in European capital markets is to bring in domestic buyers and open up new pools of money.
“There's a desire to get more capital into the sector, so [securitization] is seen as a fresh pool that hasn't been fully tapped,” said Dan York, senior director, CMBS at Fitch. “Banks have been lending during the construction phase, and to some extent on completed assets. But there's probably a limit to the amount that they want to lend and have this exposure held entirely on balance sheet.”
However, a new structure alongside new assets means some European accounts need to do extra work before they can get involved.
“The educational process for European institutional investors still needs a bit more time,” said Lambie. “You want deals to be oversubscribed to generate some price competition. As investors gain more understanding of this asset class, it will open up more opportunities.”
Some buyers of more conventional European securitizations cite the fixed rate coupons as a blocker. Their mandates are set up for floating rates, paid by vast majority of European securitizations.
A sell side source said they expect some future deals to include floating rate notes and “would not be surprised” to see them this year. One market analyst agreed, adding floating rate tranches would appeal to more European investors but said structuring such notes is a challenge.
The difficulty is hedging the deal while maintaining the benefit of a long post-ARD window to repay the principal. Long dated interest rate hedges are expensive, often prohibitively so.
The AI question
Yondr’s deal also comes as demand from AI firms is surging. The long-term implications of the technology are still being worked out, as recent swings in the equities market show.
“It's creating an issue with how you value things,” one analyst said. “How do you predict the likelihood of data centre obsolescence for AI more than a few years ahead?”
When it comes to data centres, however, AI is only a part of the equation.
“Europe still has a long way to go to get close to the IT load capacity of the US,” said Iacobucci. “If you view the two economies as quite similar, there’s a lot to be done in Europe to cover the gap. AI is a big push for this development, but it’s not just AI. AI has only accelerated the demand.”
The signs point towards more data centre demand, but the rapid development of the technology adds an element of uncertainty.
“We don’t have much concern that there will be societal change that will disrupt the demand for data, but there is risk around how that demand will be fulfilled,” said Euan Gatfield, Fitch’s EMEA head of CMBS. “It could be fulfilled using different protocols that require different sorts of data centre or different technology.”
The data centre issuance in Europe so far is a degree removed from AI because of the prime location of the collateral.
Yondr’s deal, for instance, is backed by two data centres in Slough, which is desirable for its proximity to London.
“In the recent past demand has only been increasing for digital services of all types,” said Andrew Currie, managing director, CMBS at Fitch. “At the moment, there is a level of demand in excess of what can be supplied, particularly in locations like this. The latency is always going to be really important for locations like this that are close to large cloud customer markets.”
Nevertheless, changes to demand in one part of the market could have a knock on effect.
“A lot of the value comes from the cost base,” said Gatfield. “Traditionally in real estate, a great deal of value comes from location and land value. Here, so much is about the equipment. Those parts are commodities in the global market, where prices have been going up. The rent, as a yield on cost, has to justify the delivery. If the costs fall, rents could fall.”
Yondr’s tenant has a 15 year lease, with two five year extension options, covering up to 25 years of the 30 year financing.
Given the scarcity of data centres, the starting assumption tends to be that the tenant will exercise the option to stay, giving investors a considerable degree of protection against volatility in the data centre market.