More than two dozen lenders signed on to finance two data center campuses tied to Oracle’s expansion. Months later, less than $1 billion of the roughly $38 billion package still has no buyer.
JPMorgan Chase and Mitsubishi UFJ Financial Group arranged the construction debt, split between a $23.25 billion project in Texas and a $14.75 billion project in Wisconsin. Both are senior secured credit tied to Vantage Data Centers. Bloomberg reported on October 15 that distributing the debt has taken months and drawn more than two dozen participants. Some lenders have offered to sell their positions to non-bank buyers at a discount, so the exposure comes off their books before the year closes.
The unsold remainder is small next to the total. It is also the part that says what the market thinks the loans are worth.
The same week, JPMorgan and Goldman Sachs raised the yield and loosened terms on a $5 billion debt package for Volta Infrastructure to attract buyers. Sweetening a deal to fill the order book is a normal move in a soft market. Doing it in the same week that a $38 billion distribution grinds through suggests the appetite for data center credit has narrowed.
Oracle’s five-year credit default swap spread widened 26 basis points overnight to 288 basis points, a record for the company. A credit default swap is insurance against default, and its price is the fastest reading available on how bondholders judge a borrower. The widening is notable because Oracle is not the borrower on the Vantage loans. It is the tenant whose leases underpin the cash flow that repays them.
That structure explains why the loans are slow to place. The campuses are built to serve Oracle’s cloud and artificial intelligence capacity commitments. Lenders are being asked to underwrite lease payments from a single counterparty whose own balance sheet is already stretched by the buildout, at a moment when the cost of that buildout keeps rising.
Hyperscale data center projects have moved from a niche asset class to a mainstay of bank syndication desks in about three years. The size of individual financings has grown faster than the buyer base. Insurance companies, pension funds and specialist infrastructure funds all want exposure to the sector, but each has limits on how much single-name and single-sector risk it will hold, and many have already filled those limits.
The banks arranging these deals carry a different pressure. They committed to fund construction on schedule, which means lending from their own balance sheets while they wait for buyers. Holding a slice of a multiyear project is tolerable when syndication clears in weeks. Holding it for months ties up capital that the next deal needs, and the next deals are getting larger.
Discounting to non-bank buyers solves the seller’s problem and creates a second one. A price below par establishes a reference point. The next syndication opens against that reference, and the borrower’s cost rises. Lenders who sold early at a discount will be asked by their own credit committees why they paid full price months before.
Non-bank buyers are also the part of the market least able to hold through a downturn. Private credit funds and specialty lenders that step in at a discount are taking risk that banks declined to keep, often with fewer reporting obligations and more room to restructure. That transfer works while lease payments arrive on time. It becomes complicated if a tenant renegotiates.
The leases themselves deserve attention. Vantage is a landlord, and its rent comes from tenants that signed long-term contracts for capacity they intend to fill with customer workloads. The financing documents were written on the assumption that the tenants are investment grade in substance if not in rating, and the credit market is now testing that assumption through the tenant’s own swaps.
Analysts who cover the data center landlords said the test is whether the remaining slice clears before the next tranche is priced. A clean close would suggest the discount was a timing problem. A second round of discounts would suggest the market is re-pricing the whole category, and that would show up in the cost of every project now under construction.
There is also the question of how much of the sector’s pipeline depends on this financing channel. Data center developers raise equity from infrastructure funds and real estate investors, but the construction debt is where the borrowed money sits and where the returns are made. If banks cannot place the debt, projects do not break ground, and the capacity that software companies have been told is coming does not arrive on the promised date.
Oracle’s own disclosure is the next scheduled datapoint. The company reports earnings later this month, and executives will be asked about lease obligations, capital commitments and the credit market’s reception of its tenants. The credit default swap market has already voted. The loans, unlike the swaps, still need someone to sign.
What the report does not establish is the size of the discount offered, which lenders are selling, or whether the price of the unsold portion has moved. Those details will surface in the next syndication, or in the valuations banks publish at quarter end.
