Stay informed with free updates
Simply sign up to the Artificial intelligence myFT Digest — delivered directly to your inbox.
Investors are demanding a higher-than-usual premium to back a $14bn bond offering by an Oracle-backed data centre project, amid growing concerns over the huge amounts of AI-related debt coming on to the market.
The sale, which has been privately pitched to a small group of institutions in recent weeks, is to fund a 1 gigawatt data centre in Saline Township, Michigan, as part of a $300bn agreement with OpenAI to provide the ChatGPT maker with 4.5GW of computing power, say people familiar with the matter.
However, some investors have questioned whether Oracle — whose aggressive AI spending plans have been a source of market worry in recent months — could provide sufficient guarantees to ensure debt repayment if the project were delayed or if Oracle ever exited the lease backing the project bond. The tech giant is only a tenant, rather than a joint owner of the facility.
To compensate for these risks, some investors had demanded yields of more than 1 percentage point over Oracle’s publicly traded corporate bonds due in 2040, the people said, and more credit protections, including the removal of a proposed option that would allow the issuer to buy back the debt early. Few, however, expect this ultimately to scupper the deal as the order book is still well covered.
“It’s still project finance ultimately,” one of the people said. “You’re still going to take construction risks.”
Big Tech companies have borrowed more than $100bn in global bond markets so far this year to help fund the AI arms race, fuelling investor concerns that the runaway capital expenditure might not translate into actual profits and may be a bubble that could hit the broader economy.
The Oracle-backed data centre in Saline Township, a rural community west of Detroit, is being built by developer Related Digital, and the debt is being issued by a special purpose vehicle.
Investors say that raising debt off Oracle’s balance sheet helps alleviate their concerns over the rising debt load at the company, which raised $25bn from the bond market in February after it pledged to preserve its investment-grade credit rating.
Related Digital said in a statement on Friday that it had secured $16bn in financing for the campus subject to the “satisfaction of customary closing conditions”. The deal is expected to close next week, according to a person familiar with the deal.
“The strength of this financing is a powerful validation of what we have built at Related Digital and of the critical role this project will play in America’s digital future,” said Jeff Blau, chief executive of Related Companies, the developer’s parent.
The deal’s completion could open up a new wave of financing for similar project-level bonds without equity stakes from big tech companies, said Gianluca Bacchiocchi, a partner at Clifford Chance specialising in financing energy and infrastructure projects.
The sale is being led by Bank of America and launched in the so-called 144A market on Friday, allowing thousands of institutional investors to trade the bond.
Some investors who had been approached privately were hoping to secure the debt early on and resell a portion of it for a quick profit when the deal launched to the wider group of investors, the people said.
“This is a new asset class that only emerged in recent months. There is no quant model for us to calculate what is a good relative value for a deal,” said Katie DeSplinter, head of US credit trading at Capital Group, speaking about such deals in general.
To assess such complex deals, the firm needs to quickly assemble experts across different high-grade, high-yield and asset-backed desks, she added.
Pimco is the anchor investor on the bond sale, Related Digital said on Friday. Blackstone is expected to provide about $2bn of equity in addition to the debt, the people added.
Blue Owl Capital also considered backing the project but did not proceed as negotiations stalled, the FT previously reported.
Bank of America, Blackstone and Pimco declined to comment. Oracle did not respond to requests for comment.
Unlike traditional project loans that need to be refinanced within four to six years, a project bond can provide financing with longer maturities to minimise refinancing risks.
While banks used to provide the bulk of financing for data centre build-outs, large-scale projects are increasingly turning to other types of debt investors as the massive deal sizes overwhelmed the bank market.
“There’s more caution among banks,” said Bacchiocchi. “Some are reviewing whether they need to reduce or hedge some of their positions.”
Additional reporting by Eric Platt and Kate Duguid in New York
