Morningstar DBRS Assigns Rating of BBB (low) to DI Issuer LLC and Its Series 2021-1 Notes and Places Them Under Review With Positive Implications; Assigns Provisional Rating of BBB to Series 2024-1 Notes Issuance

DBRS, Inc. (Morningstar DBRS) assigned a credit rating of BBB (low) to DI Issuer LLC (the Issuer) and its Series 2021-1 Class A-2 Notes (the Series 2021-1 Notes) and placed the ratings Under Review with Positive Implications.

Morningstar DBRS also assigned a provisional rating of BBB with a Stable trend to DI Issuer's expected $265 million issuance of Series 2024-1 Class A-2 Notes (the Series 2024-1 Notes). The Series 2024-1 Notes have a 30-year legal maturity and will be backed by a portfolio of 34 data centers and the leases in place with the tenants of these facilities.

KEY CREDIT RATING CONSIDERATIONS
The transaction involves the addition of 21 data centers to DI Issuer's existing portfolio of 13 data centers. The Series 2024-1 Notes and the existing Series 2021-1 Notes would be pari passu and secured by the same pool of collateral (the portfolio of 34 data centers). The debt sizing of the Series 2024-1 Notes, combined with the existing Series 2021-1 Notes, would result in DI Issuer's credit profile being supportive of a BBB rating with a Stable trend.

Given the current proposed parameters of the transaction, upon transaction close the Issuer Rating and the rating on the Series 2021-1 Notes would be upgraded to BBB with a Stable trend, and the provisional rating on the Series 2024-1 Notes would be finalized.

The transaction is intended as a capitalization of the existing capital structure, and the net proceeds of the Series 2024-1 Notes will be used to fund several reserve accounts and to be distributed up to the parent for general corporate purposes. The Series 2021-1 Notes currently have an outstanding balance of approximately $158.8 million.

CREDIT RATING DRIVERS
For the provisional credit rating, a ratings upgrade is not considered likely at this time.

For the BBB (low) Issuer Rating and rating on the Series 2021-1 Notes, a ratings upgrade to BBB would occur upon transaction close, assuming the proposed transaction parameters are not materially changed before transaction closing.

A ratings downgrade is not considered likely at this time but could occur if there were a material decrease in cash flow, which could be caused if tenants decided not to re-lease or left due to operational concerns. A ratings downgrade could also occur if interest rates increased meaningfully during the refinancing periods.

FINANCIAL OUTLOOK
Morningstar DBRS forecasts a minimum debt service coverage ratio (DSCR) of 1.61 times (x) during the initial term of the Series 2024-1 Notes, which runs through September 17, 2029. Morningstar DBRS calculates the ensuing refinancing period to have a minimum DSCR of 1.19x, constraining the core assessment to BBB (low). One notch of positive uplift is applied to the core assessment to account for the soft refinance nature of the debt, in which a failure to refinance would not lead to a default but rather to a cash sweep in which all cash after expenses and interest payments would be swept to pay down debt, leading to full principal repayment well before the September 15, 2054, final maturity. The resulting rating is BBB.

CREDIT RATING RATIONALE
The BBB provisional rating on the Series 2024-1 Notes is underpinned by (1) stable cash flow deriving from lease payments to the data centers; (2) the expected resiliency and sticky nature of the revenue stream owing to the critical and strategic nature of the data center assets to the tenants' business operations; and (3) a strong and favorable debt package to noteholders. The debt and security package offer protections to noteholders typical of that expected of a well-structured project finance transaction. The primary challenges to the credit ratings include (1) re-leasing risk of each lease at various intervals, subjecting the Issuer to the risk of tenants opting out of their leases or the Issuer needing to grant concessions as an inducement for tenants to remain; (2) risks related to technical obsolescence or deterioration of competitive position; and (3) lower rated or nonrated tenants.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781

RATING DRIVER ASSESSMENT AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of Rating Driver Factors
In the analysis of DI Issuer LLC, the Rating Driver factors listed in the methodology are considered in the order of importance.

(B) Weighting of FRA Factors
In the analysis of DI Issuer LLC, the following FRA factor was considered more important: minimum DSCR.

(C) Weighting of the Rating Driver Assessment and the FRA
In the analysis of DI Issuer LLC, the FRA carries greater weight than the Rating Driver.

Notes:
All figures are in U.S. dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
Global Methodology for Rating Essential Digital Infrastructure (15 April 2024)
https://dbrs.morningstar.com/research/431172

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (15 April 2024) https://dbrs.morningstar.com/research/431186 which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies and criteria have also been applied:
Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024)
https://dbrs.morningstar.com/research/437781

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

A provisional credit rating is not a final credit rating with respect to the above-mentioned security and may change or be different than the final credit rating assigned or may be discontinued. The assignment of the final credit ratings on the above-mentioned security are subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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