Morningstar DBRS' Takeaways From 2025 Credit Insights Calgary: Methodology Updates, Digital Infrastructure, and Bespoke Financing Structures

As part of its takeaways series, Morningstar DBRS is publishing several write-ups from Credit Insights Calgary, a well-attended event with discussions focused on credit market conditions influenced by geopolitical tensions, tariffs and counter-tariffs, changing interest rates, and the Canadian federal election. Participants in the renewable sector, particularly in the U.S., are facing an uncertain market because of potential tariffs while the digital infrastructure space continues to grow, driven by the digitization of the global economy.

Jaideep Nagpal, Senior Vice President, Project Finance, reviewed the recent updates to the methodologies Morningstar DBRS uses to rate project finance transactions and recent trends in the project finance space. Afterward, Arthi Sambasivan, Managing Director, Corporate Ratings, Asset, Project & Sports Finance, queried Nagpal for additional insight about the current trends and types of transactions observed in the Canadian market.

"Typically, we review our methodologies annually and, last year, we consolidated three separate project finance methodologies [Wind, Solar, and Project Finance] into one," Nagpal said. "We removed some superfluous information and made it much more readable and transparent." The streamlined methodology introduced new guidance for rating merchant (i.e., uncontracted) renewable (solar and wind) projects, recognizing that uncontracted projects are subject to greater price and volume risks.

Digital infrastructure, such as data centres, towercos, and fibre optic networks, fits well into the project finance framework as these are essential assets with an economic life of up to 35 years, and cash flows largely supported by contracts. But digital infrastructure does have specific risks and characteristics, so in March 2023, Morningstar DBRS published its "Global Methodology for Rating Essential Digital Infrastructure," which uses the project finance framework to rate digital infrastructure assets. "With digital infrastructure, however, several methodologies--including real estate methodologies-- can be applied, depending on the way the transaction structure is provided to us," said Nagpal.

Funding across all digital infrastructure generally features an initial interest-only term note for five to seven years for an asset with a deemed economic life of 30 years to 35 years. "With data centres, we're starting to see shorter-term contracts of 10 years to 15 years, even for hyperscale data centres, such as those built or leased by companies like Amazon or other hyperscalers," Nagpal said. "And, although there are options to extend contracts, it creates re-leasing (re-contracting) risks." Churn rates, both historical and forward looking, are taken into consideration as mitigants for releasing risk, particularly with colocation data centres.

Q: Sambasivan asked about the Canadian data centre market, specifically in Alberta, which has been touted as a province presenting very favourable investment conditions for data centre growth.

A: Nagpal noted the Canadian data centre market is much smaller than that of the U.S. but is expected to continue to grow. Currently, Toronto, Vancouver, Montréal, and Calgary are the key Canadian markets for small to moderate size data centres. However, Alberta's strategic initiatives make it well positioned to attract investment in data centres, particularly larger hyperscale deployments. With its abundant natural gas and merchant power market, the province has the capacity to accommodate these power-hungry projects. In addition, Alberta's weather presents a natural advantage in cooling, and its low corporate tax rate supports economic growth. Furthermore, in Canada, data sovereignty rules are more protective than in the U.S., which is expected to support growth in Canadian data centres.

Q: "Among the trends we've been seeing in project finance is the increasing popularity of bespoke financing structures. Besides the customized structure, from the credit rating perspective, what features are we looking at in these transactions?" Sambasivan asked.

A: The structure typically features an investment-grade corporate entity as the majority owner with a private equity firm as the minority owner in a joint venture. "The debt issued by the minority owner is back leveraged (at the holdco level) , serviced by relatively stable cash flows from the typically strategic asset that is contributed by the majority owner in a passive joint-venture structure," Nagpal said. The recent Rogers-Blackstone transaction is a good example of a customized funding structure whereby the cash flow from Rogers' backhaul fibre network--an essential asset--will service the debt and provide Blackstone (the minority owner) with a stable revenue stream.

"We've rated a lot of such bespoke capital transactions, but they're all private credit ratings," Nagpal said. Given the unique bilaterally negotiated structures, different ratings methodologies can apply."

Q: Sambasivan noted that Indigenous participation in large, energy infrastructure projects in partnerships with major energy companies is growing in Canada. A key challenge to such participation was the lack of access to equity capital at affordable cost and this issue has been bridged by federal and provincial government support of equity participation in these financings. "We currently have at least six renewable projects with Indigenous participation, all of which are rated investment grade and have stable operating performance," she said. "Do you see any credit impact with Indigenous participation in these projects?"

A: "We're seeing large growth in the Indigenous participation in energy products, renewables, and oil and gas," said Nagpal. The key challenge was the cost of equity, but now we can see how the federal and provincial program guarantees are encouraging Indigenous participation.

Sambasivan noted that, with such equity participation, some of these projects benefit from the streamlining of some of the permitting processes. With buy-in from all the sponsors, permitting has been, while not entirely seamless, more efficient. With credit ratings, however, "we're focusing on the pass-through of the costs, the cash flow for the fundamental project to support the financing and credit ratings," she said.

Written by Deirdre Maclean

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