Banks seek to offload risk to avoid ‘choking’ on data centre debt

Banks are hunting for new ways to offload risks tied to a glut of data centre debt as the race to build AI infrastructure stretches financing limits among the largest global lenders. 

Groups including JPMorgan Chase, Morgan Stanley and SMBC are trying to find ways to distribute portions of data centre-related deals to a broader range of investors, according to people familiar with the matter. 

Lenders are exploring private deals to sell stakes in the debt as well as so-called risk transfers to reduce exposure to big borrowers and free up capacity for more lending.

The efforts showcase the unprecedented scale of borrowing that underpins the AI sector and the pressure it is putting on lenders. Oracle and CoreWeave, two data centre operators, have borrowed hundreds of billions to build sites across the US for AI labs.

“The sizes we’re talking about . . . they’re out of scale to anything we’ve thought about, ever,” said Matthew Moniot, co-head of credit risk sharing at Man Group. “Banks very quickly start choking.”

Lenders, including JPMorgan and MUFG, have spent more than six months distributing $38bn of construction debt tied to a data centre project leased to Oracle in Texas and Wisconsin, people familiar with the matter said.

Some banks sought to sell the loans at a discount to non-bank lenders to offload the Oracle-linked debt, the people said.

JPMorgan, Morgan Stanley, SMBC and MUFG declined to comment.

Banks have in recent weeks sounded out investors about structures including a variant of a significant risk transfer, or SRT.

SRTs have been commonly used by European banks to reduce their capital requirements by offloading the risk of losses on part of a loan portfolio to investors such as private credit funds and insurers in exchange for a return. North American banks have begun using the instruments more in recent years.

Rather than a classic SRT that may be tied to dozens of loans, banks are exploring slicing and dicing large and concentrated data centre loans to shift the riskiest portions off their books, for example.

“Banks usually still hold a certain percentage of the exposure,” said David Lucking at law firm Linklaters, who has seen deals in the $500mn range backed by lone borrowers. “The SRT investor would like to know that banks still have a little bit of skin in the game.”

Investors expect more such moves as banks come up against risk limits that restrict their exposure to individual borrowers or sectors, and seek to free up balance sheet for more lending.

“Unlike a traditional SRT, there are limited operators, it’s extremely concentrated and there’s significant construction risk,” said Frank Benhamou, portfolio manager at Cheyne Capital. “You expect to be paid a bit more for it.”

Growing public opposition to data centres in parts of the US has also added to risks facing the projects. Lawmakers in the northeastern state of Maine passed a statewide ban in April.

“If I was a chief risk officer at a bank, and I had bankers asking for multibillion-dollar lines to individual projects, I’d be asking them about how they sell it down,” said Moniot.

Companies have already started expanding to new debt markets beyond bank lending by issuing private credit, asset-backed securities, commercial mortgage-backed securities and privately placed bonds.

“There’s a nervousness . . . [Banks] are having to find more counterparties in order to achieve for what’s in the market and in the pipeline,” said Carlos Mendez, co-founder at Crayhill Capital.