Hot Stacks is 9fin’s weekly take on data center finance — the deals moving the market, the people behind them, and the risks and opportunities buried in the stack.
The hot stack
Just in time for Halloween, AI infrastructure credit investors may find themselves spooked after Oracle recently invoked a force majeure clause at a major New Mexico data center development.
Triggering such an event allows a party to shield itself from financial liabilities or collect compensation when a deal is disrupted by forces beyond its control — ‘an act of God.’ The particulars are often spelled out in the fine print of debt offerings.
Depending on the language, force majeure protections could even potentially allow a tenant to terminate a lease commitment, sowing far worse economic damage than the postponed rent payments or abatements Oracle appears to be seeking.
Oracle’s planned New Mexico facility, called Project Jupiter, has faced local public opposition and regulatory delays.
The situation is still an outlier, but headline news has a way of making investors snap to attention. And amid the torrent of data center debt issuance, a growing number of potential future force majeure candidates are boiling to the surface like bubbles in a witch’s cauldron.
Take Tract Capital. Early this year, a subsidiary of the investment firm sought to raise $3.65bn for a 200 megawatt project it is planning outside of Reno, Nevada that will be occupied by the chipmaking giant Nvidia.
The response from investors was so overwhelming (Bloomberg reported it received $14bn of interest) that banks leading the deal upsized the offering to $3.8bn while cutting the offered interest rate from 6% to 5.875%.
A few months later it raised another $4.6bn of junk bonds for a second nearby 200 megawatt data hall that will also be leased by Nvidia. That deal priced at a similarly favorable 6.5% rate.
Since then, both bonds have charted price declines that resemble a Himalayan topographical map. The $3.8bn SSNs due March 2031 have declined around 11 points to 90.53 since pricing above par in February, while the $4.6bn of SSNs due May 2031 have dropped 7 points to 91.72 since pricing at 99 OID in April, according to 9fin data.
To be fair, interest rates across debt markets are on the rise and investor sentiment around AI infrastructure in particular has been highly volatile. Yet market conditions alone can’t explain why Tract’s bonds have plunged so sharply. So what went wrong?
A buyside portfolio manager whose investment firm holds some of the debt tied to Tract’s data centers, attributed the anxiety to air permits that Tract is seeking for natural gas powered turbines and backup generators it plans to install at the two facilities. Hot Stacks confirmed with Nevada regulators that Tract hasn’t yet received the permits.
“I don't really anticipate a big issue there,” the manager said. “But that has obviously been putting pressure on Tract.”
Adding to its potential headache is a lawsuit from NV Energy, Nevada’s largest utility. It sued Tract in August, alleging that the firm is attempting to saddle ordinary Nevada ratepayers with the massive bill needed to power its planned 2 gigawatt power buildout.
Tract isn’t the only builder getting tripped up by permitting, politics, and regulatory pushback.
As 9fin reported last week, a partnership between the investment firm Coatue Management and the data center developer Fluidstack stumbled in its attempts to secure a flood plain permit at an Oklahoma data center that it is currently developing for Jane Street. $2.25bn of bonds issued for that project in August at 8.875% now yield more than 11% because of the situation, 9fin data shows.
Meanwhile, a wave of Texas projects has stalled under intensifying state scrutiny, brought on by Governor Greg Abbott’s order last month to freeze new data center permits so the state can audit the tidal wave of development. In one example, $3.5bn of junk-rated bonds that had been issued to fund the Helios Data Center Campus dropped by 4 cents on the dollar (the equivalent of a full percentage point rate increase) in the days after Abbott’s order. For more color on the great Texas data center chill, read my column from last week.
Given the hair-raising Oracle situation, bond investors are scrambling to protect themselves. Their ultimate garlic or wooden stake? Taking the time to understand and thoughtfully game out a project’s potential liabilities — and making sure that they’re getting paid accordingly for the risks they’re taking.
“Bondholders are becoming more and more aware of what to look for and what the inherent risks are in these various projects,” an investment grade private credit banker at a major financial institution told Hot Stacks. “Investors are going to spend the time to diligence these appropriately and make sure that they’re comfortable with the risk that they’re taking and that they’re being compensated appropriately for that.”
The hype
- Brookfield: the investment giant and Naver (South Korea’s Google) are closing in on a roughly $9bn loan from five South Korean banks to finance the purchase of GPU chips that the pair will install at a data center in the country. Brookfield, Naver, and Nvidia had previously announced they planned to partner to build a 200 megawatt facility in the city of Sejong and Naver has stated it will eventually expand its deployment of Nvidia GPUs in the country to 1 gigawatt
- Nebius: is looking to issue $3bn to $4bn of junk bonds with Goldman Sachs acting as the bookrunner. The deal is being watched closely as the recent spike in bond pricing has prompted some issuers, including Applied Digital and Novva Data Centers, to postpone offerings to the fourth quarter
- Volta: the data center and AI cloud company received strong interest for a $5bn leveraged loan offering, with sources saying that it was oversubscribed. The facility in Norway will be leased by Anthropic (who we also reported is in talks for a large Texas data center lease to bolster its portfolio of computing facilities). JP Morgan launched the financing on 5 October with bids due on 14 October
- Texas: Data center debt is trading down after Governor Greg Abbott ordered a pause on new permits to allow for regulators to audit the power and water used by the facilities. Galaxy Helios Data Centers 2 bond for Galaxy Digital’s Texas data center campus dropped by roughly three points to 95.88 on 21 September after the announcement, according to 9fin data
- SpaceX: Musk’s company is seeking to raise $40bn for Nvidia chip purchases in a financing led by Apollo
Other news
AI boom puts US earnings on course for third quarter of 25% growth (Financial Times)
Tiger Global to earn $5bn paper profit on OpenAI investment (Bloomberg)
Google halts work on two data centers in Finland (CNBC)
Samsung profit surges ninefold to $80bn on AI chip demand (Financial Times)
Elon Musk took heat at a chaotic Memphis data center moratorium vote (Business Insider)
