Morningstar DBRS Confirms DI Issuer LLC at BBB, Stable Trends

DBRS, Inc. (Morningstar DBRS) confirmed the credit ratings of DI Issuer LLC (DI Issuer), its Series 2021-1 Class A-2 Notes (the Series 2021-1 Notes), and its Series 2024-1 Class A-2 Notes (the Series 2024-1 Notes) at BBB with Stable trends. The Series 2021-1 Notes and Series 2024-1 Notes are pari passu and secured by the same pool of collateral: a portfolio of 34 data centers and the leases in place with the tenants of these facilities.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation reflects DI Issuer's recent transaction involving the addition of 21 data centers to DI Issuer's existing portfolio of 13 data centers and issuance of the $265 million Series 2024-1 Notes. This transaction greatly increased the size of DI Issuer's data center portfolio and resulted in stronger debt service coverage ratios (DSCRs), leading to Morningstar DBRS' upgrade of DI Issuer's credit rating on September 24, 2024, to BBB with a Stable trend.

DI Issuer's debt structure features a minimum DSCR of 1.58x and a refinance minimum DSCR of 1.19x based on the Morningstar DBRS credit rating case. The combination of the refinance metrics (which, in Morningstar DBRS' view, reflects the larger portion of the project risk) with the minimum DSCRs in the initial period are consistent with BBB (low) credit ratings.

Morningstar DBRS applies a one-notch uplift to account for the debt's soft refinance nature, in which a failure to refinance does not lead to a default but rather to a cash sweep where all cash after expenses and interest payments is swept to principal. In the unlikely event that the Sponsor does not refinance the debt for the full duration to legal maturity, cash flows up to approximately 17% lower than those projected in the credit rating-case assumptions are still sufficient to fully amortize the debt.

Debt servicing of the notes will rely on lease payments received by each AssetCo entity, which are subsequently upstreamed to the Issuer. Based on the features of the debt security package, the covenant package provides bondholders with credit protections akin to a traditional project finance transaction. Such features include: guarantees from each of the AssetCos and DI Guarantor LLC (the Guarantor), which owns 100% of the equity interests in the Issuer; fee-simple mortgages over most of the data centers; security interests in all lease revenue received from tenants as well as both the Issuer's equity interest in each AssetCo entity and the Guarantor's equity interests in the Issuer; a three-month interest service reserve account, funded either in cash or through a letter of credit; and a restricted payment test (i.e., a dividend payment test) with a required minimum Amortization DSCR of 1.30x.

CREDIT RATING DRIVERS
A credit rating upgrade is not considered likely at this time.

A credit rating downgrade is not considered likely at this time either but could occur if there were a material decrease in cash flow, which could be caused if tenants decided to not re-lease or left due to operational concerns. A credit rating 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 1.58 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). Morningstar DBRS applies one notch positive uplift 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 the debt, leading to full principal repayment well before the September 15, 2054, final maturity. The one notch positive uplift results in the BBB credit rating.

CREDIT RATING RATIONALE
The BBB credit rating is underpinned by (1) stable cash flows deriving from lease payments to the data centers, (2) the expected resiliency and stickiness 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 offers protections to noteholders typical of a well-structured project finance transaction. The primary constraints on the credit ratings include (1) re-leasing risk of each lease at various intervals, subjecting the Issuer to the risk of either the tenants opting out of their leases or obliging the Issuer 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 factors 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 Factors and the FRA
In the analysis of DI Issuer LLC, the FRA carries greater weight than the Rating Drivers.

Notes:
All figures are in US dollars unless otherwise noted.

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

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 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 methodology has also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 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.

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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