Options include capital recycling via Reits, asset-backed securities and private credit funding
[SINGAPORE] Asia-Pacific (Apac) data centre operators will look beyond bank funding to recycle capital and secure funding to support over US$100 billion in planned construction over the next five years, according to S&P Global Ratings.
Alternative capital options like asset-backed securities (ABS) and private credit could be used alongside traditional funding sources in places like Singapore, it said. This would follow trends in the US and Europe. Real estate investment trusts (Reits) could also provide a potential path to capital recycling as data centres mature.
Data centre capacity in Apac is expected to rise at a compound annual growth rate of 16 per cent through 2030, according to S&P Global Market Intelligence 451 research. The region’s data centre operators thus “have to” broaden their capital sources during this expansion phase.
“The region’s expanding funding needs will test banks’ ability to keep funding new developments as banks typically have limits on single-entity and industry exposure,” said the report, which was released on Monday (Sep 22).
Limited scale for data centre operators across Apac has translated into lower capital requirements in the past decade, said S&P. Therefore, bond investors’ appetite in the region has been “largely untested” and bank funding has been sufficient for capital requirements.
Data centre operators in the region currently rely “heavily” on bank loans and equity capital, said S&P, with only 9 per cent of their aggregate capital structures comprising debt instruments such as bonds, debentures, and compulsory convertible debt. This contrasts with US operators like Equinix and Digital Realty Trust, who use debt for 51 and 36 per cent of their capital.
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“A diversified funding strategy could offer a competitive edge by allowing faster deployment, and a potential first-mover advantage,” said the report.
It noted that Singapore’s Princeton Digital Group and ST Telemedia Global Data Centres have “generally” been backed by private equity, pension or infrastructure funds so far, allowing them to expand at a faster pace than their peers.
New funding sources
Structured finance, especially ABS, could be possible financing options for lenders and investors in “mature markets” with supportive regulations like Singapore, said the report.
Ring-fenced ABS structures will allow for credit assessment focusing on the specific data centre project’s underlying assets and cash flows. S&P added that such structures can usually accommodate higher leverage levels compared with corporate bonds and bank loans due to tight structures and defined cash flows.
Like in the US and Europe, the Apac countries of Singapore, Japan and Australia have established track records of ABS issuances. However, ABS issuances by data centres in the region have generally remained “scarce”, particularly in Malaysia, Indonesia and India, contributing to an “uneven” use of such structured instruments across Apac.
Project finance could also be a viable option for operators with large development needs, said the report, with a key advantage being its consideration of construction risk. Ring-fenced projects could also provide lower financing costs than corporate finance if they derive support from stable cash flows with strong tenant covenants.
Meanwhile, private credit in more “mature” countries such as Singapore and Australia can offer the flexibility to structure deals “at speed”. This speed is vital in fast-growing markets where assets and resources are highly sought-after, said S&P. However, it tends to have a higher cost of capital, tighter covenant packages and needs collateral pledges.
The report pointed to Singapore-headquarted DayOne Data Centers seeking a private credit loan of US$1 billion for its expansion across Asia as an example of private credit usage in the region.
It added that Reits have proven “effective” for capital recycling, especially with stabilised assets, and could be a potential outcome for Apac data centre operators. Such recycling is expected to happen later in a data operator’s life, with the need to first amass sufficient mature data centre assets.
Singapore’s Keppel DC Reit, which on Tuesday announced the acquisition of a Tokyo data centre, was cited as an example. S&P pointed to the growth of its assets under management from S$1 billion at the time of its initial public offering in 2014, to over S$5 billion now.
It also said NTT DC Reit, which listed on the Singapore Exchange in July this year with a portfolio size of US$1.6 billion, as having an “extensive” portfolio that could be eventually recycled into the Reit.
Beyond funding and capital recycling, S&P said it expects to see a rise in more equity partnerships, mergers and acquisitions in Asia-Pacific among data centre operators. This will likely be among larger operators establishing a pan-Asian presence, or local data centre operators seeking partnerships to establish stronger customer bases and strengthen their expertise.
“In emerging countries such as Thailand and the Philippines, local partnerships may be inevitable to gain access to key local knowledge and resources,” said the report. “The existence of a local label could also minimise potential regulatory concerns over data sovereignty.”
