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The huge amount of capital expenditure required by the build out of data centers and energy infrastructure in the US has become increasingly relevant across credit markets. Projects including power plants, renewables and digital infrastructure are attracting attention from direct lenders, securitization markets and leveraged finance investors alongside traditional project finance options at various stages of their life cycles.

9fin caught up with RBC Capital Markets’ global head of project finance, Nanda Kamat, about the surging appetite for lending in these sectors, and the evolving landscape of project finance.

1. You joined RBC in November. Given your experience, how do you see RBC’s project finance strategy evolving, and where do you see synergies across divisions like RBC’s investing banking?

RBC has always had a strong project finance team, which historically focused on the energy sector and in the last few years has been active in renewables as part of the firm’s initiative to triple renewable energy lending by 2030. My role is to build on that experience and expand our lending business into sectors such as conventional power and digital infrastructure. There are strong synergies with our investment banking M&A and coverage groups in sectors such as power/utilities, energy, infrastructure, and communications. Additionally, other products within our capital markets business such as leveraged finance, private placements, securitizations, and interest rate derivatives, are all essential to our project finance franchise.

2. Data centers have rapidly become an essential part of digital infrastructure globally. What does demand for data center financing look like, and what are the primary funding structures being used for data center projects?

There is strong demand in the project finance market for construction financing for hyperscale data center projects. Typically, we see these projects being financed as construction/term loans which provide sufficient time to construct the data center and achieve stabilization. The primary long-term sources of refinancing for data centers once constructed are the ABS, CMBS, and private placement markets.

3. While the AI boom is fueling data center demand, there's concern about its sustainability. If computing power demand plateaus, how might this impact financing strategies and investor risk appetite in the data center sector?

The AI boom has been a source of data center demand, but migration to the cloud has been equally important and isn’t expected to slow down. That said, if demand from AI slows down, lenders will likely be more conservative around lease renewal assumptions for facilities intended for AI and those not in top-tier data center markets. Lenders will also likely become more selective around which data center platforms they support, and look to more established players with long track records of serving hyperscale tenants.

4. Fiber to the Home (FTTH) is another asset that’s attracting interests from infrastructure funds as well. How are these projects typically financed in their early stages, and what are the exit strategies? What market trends are influencing investor considerations?

The project finance market has been financing the buildout of FTTH networks in the US since 2022. These FTTH financings are largely still in the build phase given they’ve only been financed in the last 2-3 years, but the takeout is expected to be in the ABS market. Investor considerations are largely influenced by ability to achieve and maintain penetration targets, so having a strong anchor tenant is key. Also, lenders are focused on the potential for overbuild, so financings have primarily been in markets that are under-penetrated.

5. With increasing power demand, there seems to be interest in both renewables and thermal power generation. How do the financing profiles and risk-return characteristics of renewable projects compare to those of traditional thermal power projects?

Renewables projects are typically faster and easier to build than thermal power projects, with less complex operations. However, renewables projects are exposed to resource risk (i.e. the risk that the wind or the sun are inadequate to generate power) while thermal power projects have fixed gas supply. Returns on renewables projects have been lower than on thermal power for both debt and equity investors given the strong demand to participate in the transition to renewable power. That said, we see increased interest in thermal power from both debt and equity providers given the surging demand for power in the US.

6. We're seeing single-asset deals financed in the traditional leveraged finance market as well. What are the fundamental differences between these approaches? At what stage of an asset's life cycle is project finance most relevant?

Project finance is typically most relevant during the construction stage of an asset’s life cycle. Project finance lenders know how to assess, price and mitigate construction risk, and the delayed draw feature of bank loans makes bank financing attractive for greenfield assets. Both the project and leveraged finance market will finance operating assets, but the debt sizing and structuring approach differs. Project finance is more focused on debt service coverage ratios, and typically involves more structural protections for lenders. Leveraged finance is more focused on leverage metrics, and typically offers less structural protections for lenders and higher pricing.

7. What are the most promising sectors for growth in project finance this year and in the coming years?

This year, we expect to see increased activity in LNG and gas-fired power generation, as well as continued strong activity in digital infrastructure (data centers in particular) and renewables. In the coming years, digital will continue to be active as will power generation (both renewables and conventional) given the demands on the power grid, which should also drive financing of new transmission projects.

8. How does the rise of private credit affect the project finance landscape?

Private credit is expanding the project finance landscape by providing another financing option to sponsors. Often, private credit can finance projects that banks can’t, and it can also be complementary to a bank financing.  We see more private credit providers participating in project finance syndicates alongside traditional bank lenders.

9. On a lighter note — What’s your favorite park?

I went to NYU undergrad, so Washington Square Park will always hold a special place in my heart. It also has great people watching.

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