Urbacon Data Centre Solutions is offering a CA$320 million note securitizing revenues from a single turnkey, hyperscale data center located in Richmond Hill, near Toronto, that is fully leased to the Canadian operating subsidiary of an unidentified technology company with a stellar rating.
The fixed-rate, interest-only note is expected to be repaid within five years, during which all excess cash flow will be used to "hyper-amortize" the note, according to Fitch Ratings, which rates the note single-A. The proceeds of the deal, structured and led by TD Securities, will be used to repay an outstanding bank facility, fund a liquidity reserve, pay estimated third-party fees, and return equity to the issuer.
Fitch said the property was built for the specific tenant, whose identity the rating agency knows but declines to identify, and leased to the tenant across a first stage starting in March 2023 and a second one in January 2024. The tenant leases all of Urbacon's current data center portfolio. The lease backing the current Urbacon Limited Partnership Secured Data Center Revenue Term Notes, Series 2025-1, expires at the end of 2033 and includes two, five-year extension options and annual escalations beginning Dec. 1, 2028, of the lower of the Consumer Price Index (CPI) or 1.50%, according to Fitch.
Bloomberg recently reported that the mystery tenant is a AAA-rated technology company.
Fitch notes several deal plusses and minuses. On the negative side, the securitization is secured by a single data center operated by a single tenant, and so more susceptible to event risk he interest-only loan structure increases refinancing risk. In addition, much of the proceeds will be used to return sponsor equity.
"Based on an appraised value of CA$506 million [of the data warehouse facility], there is CA$186 million of implied equity in the deal," Fitch says.
On the plus side, Fitch noted, secular trends including cloud computing, AI, internet of things, and 5G wireless have fueled exponential growth in demand for data capacity.
"According to Green Street, the past five years have set records for new leasing activity across the top U.S. data center markets," Fitch said.
In addition, the manager, Urbacon Data Centre Solutions, can be terminated for cause and replaced by the issuer or its servicer.
