Moody's issues ratings methodology for Data center ABS

The structured finance group (SFG) at Moody's Ratings released a rating methodology for data center securitizations, building on its existing analysis of the fast-growing sector.

"This new methodology provides a comprehensive framework for assessing the credit risk of data center asset-backed securities," Moody's says in the February 6 report.

The Moody's structured finance group has rated commercial mortgage-backed securities (CMBS) backed by data centers before, through its project finance group. Its REIT teams have also rated data center debt, says Daniela Chun Jayesuria, associate managing director of the structured finance group at Moody's.

Introducing the data center ratings methodology comes ahead of what Moody's foresees as substantial growth for the industry this year. In a January 14 report, the rating agency notes technology giants including Microsoft, Amazon, Google, Facebook, Meta and Oracle rapidly building and leasing new data centers and expanding into newer and smaller markets.

"This growth requires data center developers and landlords to raise substantial development capital in the form of equity, bank loans, corporate and securitized bonds, or project finance vehicles," Moody's says. "Leverage levels will likely increase for developers focused on hyperscale buildouts to be completed in 2026-28."

Two data-center lease ABS deals have already been launched in February. Sabey Center Properties is in the market with a $410 million, single-tranche offering of five year notes rated A2, and Compass Datacenters is seeking to price two series of notes totaling $885 million and issued from its new master trust.

Guggenheim Securities is the arranger on both deals.

The methodology evaluates net cash flows from tenant lease payments, considering factors such as lease renewals, tenant default risk, and data center location. It will also provide detailed modeling of lease revenues, operating expenses, and capital expenditures to project cash flows and assess credit quality. Transaction structures, including triggers, liquidity support, and interest-rate risk will be included in the analysis mix, as will ongoing evaluation of servicer reports and market trends, Moody's says.

"Potential losses to investors in data center ABS transactions are primarily driven by declines in lease revenues and increases in expenses that weaken cash flows to the transaction," according to the methodology.

Key risks, Moody's says, include re-leasing data centers due to uncertainty regarding lease rates and terms, and the credit quality of the new tenants; tenant default risk and concentration; data center location and concentration; and risk of the data center's technology becoming obsolete.