Morningstar DBRS' Takeaways From Global ABS 2025: Placing Data Centres in the Securitisation Market

As part of its takeaway series, Morningstar DBRS is publishing several write-ups about pertinent topics discussed at Global ABS, one of the largest annual structured finance events, hosted in Barcelona. On 11 June, Mirco Iacobucci, Senior Vice President and Sector Lead of European Commercial Real Estate Ratings at Morningstar DBRS, spoke on a panel that discussed the funding mechanisms available for data centres and fibre infrastructure.

Data centres have sparked a lot of conversation in Europe, especially since the first European securitisation backed by data centre assets (Vantage Data Centers Jersey Borrower SPV Limited; rated A (low) by Morningstar DBRS) hit the market in May 2024. Because this is a relatively new asset type, there is still some debate about the most suitable credit rating methodology approach, which formed the focus of the panel's discussion. "We have a methodology that theoretically works for both a commercial mortgage-backed security (CMBS) or asset-backed security (ABS) approach, but from our side, [data centres] are commercial real estate (CRE)", said Iacobucci. This is primarily because the main source of income comes from the price per kilowatt, similar to the price per square metre in traditional CRE assets, but also because of the loan structures. "You lack the granularity usually seen in ABS products", Iacobucci said. "Most data centre transactions are single loan so are exposed to refinancing risk from one single facility". While Morningstar DBRS starts from a CMBS point of view, Iacobucci asserted that its "Rating and Monitoring Data Center Transactions" methodology does allow for analysis based on some ABS features.

Iacobucci also acknowledged the complexities of using a CRE approach to rate data centres, arguing that this type of securitisation requires less traditional analysis. Most data centres are generally rented by investment grade (IG) tenants on long-term lease agreements, reducing the cash flow volatility of the securing collateral. "In the CMBS space, we are more used to analysing leases from non-IG tenants and on relatively short terms, with subsequent reletting risk", he said. "But the property quality of the data centre is also extremely relevant--we need to look at power availability, redundancy, computing capacity, and connectivity, which are not typically relevant metrics for CRE."

The panel then explored expansion opportunities for digital infrastructure financing, including but also beyond data centres. As installed data centre capacity in Europe is set to increase to 20 gigawatts (GW) from five GWs over the next 10 years, there are questions about where else the market could go. "Our methodology is a global methodology because we definitely see data centres expanding in Australia, Asia, and South America", said Iacobucci. "While different jurisdictions will pose different challenges, our approach to analysing data centers can be replicated across the globe". He also touched on financing other assets, such as cell towers. "This asset type is more clear cut. We would mostly use a debt service coverage ratio approach here--definitely not a real estate angle", he said.

When the panel opened the floor for questions, the audience focused on two particular areas of risk: how credit rating agencies analyse the risk from technological obsolescence considering the long loan tenor on investment and whether the rate of increase in processing could reduce demand. Iacobucci said he was more concerned about the latter, as improvements in processing could lead to less space required by data centres. "It's an inevitable risk, as we are dealing with an asset type that is highly exposed to the technology disruption", he said.

As with any discussion about data centres, the panel was also directed towards sustainability concerns, although they generally agreed that these have been improving. Iacobucci drove home the point that sustainability is a key aspect discussed with issuers: "They do try to be more efficient on that front. If it is not the first thing discussed during meetings with operators, it is likely the second", he noted.

For more information about Morningstar DBRS' approach to rating data centres, please see its "Rating and Monitoring Data Center Transactions" methodology at https://dbrs.morningstar.com/research/452372.

Written by Ella Rigby

Notes:
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