Initial Cash Sweep: Financing Options for Data Centers

Financing data centers can be complex, especially when considering the development risks associated with greenfield projects versus brownfield projects. In a portfolio financing, operational revenues from other data centers within the borrower's portfolio can offset these risks. We have seen financings of single assets and portfolios of greenfield data center projects financed on a cross-guaranteed and cross-collateralized basis.

Financing options for data centers are diverse, depending on the development stage or level of operating maturity of the asset. Financing structures can be structured on a project financing basis, real estate financing basis, or receivables financing basis. For the purposes of this guide, we will focus on financings of a single asset on a project financing basis.

An understanding of these issues and the various options, flexibilities, and alternatives available is vital to arrive at an appropriate and balanced position that addresses both borrower and lender sensitivities. With the shift towards remote working, increased connectivity, and digitization of company operations such as supply chains, digital assets will become increasingly important in supporting the growth of Smart, sustainable cities.

As part of this series of guides, we set out below some key considerations for financing data centers based on our extensive global experience advising infrastructure investors, developers, and lenders on such matters. Financings in this sector are certainly far from commoditized, however there are key themes and issues underpinning sponsor and lender considerations in each case.

The impact of Covid-19 combined with a growing governmental focus on improving connectivity is expected to accelerate the growth of digital infrastructure investments. Initially, this was primarily related to towers, but in recent years we have seen a broader application to fiber/broadband investments, data centers, and other digital infrastructure opportunities such as cable and satellite.

Over recent years, there has been a growing focus by infrastructure funds and other investors on digital infrastructure as a distinct asset class, which has in turn led banks and other financial institutions to follow suit. With the increasing importance of data centers, it is essential to consider the various financing options available to achieve off-balance sheet limited recourse financing.

In this guide, we will explore these key considerations for financing data centers, highlighting the complexities and opportunities that arise from the intersection of greenfield projects and brownfield projects in a portfolio financing context.

Initial cash sweep