Data centre debt: Navigating shifts in sentiment

Data centres are becoming increasingly important in credit markets, as accelerating artificial intelligence (AI) adoption and continued growth in demand for cloud solutions drive significant capital expenditure (capex) needs. The corporate high yield (HY) bond market is playing a significant role in this funding and has overtaken private credit and securitisation as the fastest-growing source of capital for data centres. A recent Bank of America survey showed that investors expect US dollar HY data centre issuance alone to reach $60bn by year-end 2026, versus the around $36 bn printed year to date (YTD). This sits alongside significant investment grade (IG) issuance as hyperscalers seek to finance infrastructure needs to meet ever-increasing demand. 

While European HY issuance has so far lagged the US (around $2 bn YTD), activity is beginning to increase. In May, data centre developer Polar Data Centers (Polar DC) issued an €800m Nordic HY deal, and neocloud company Coreweave followed in June with a $3bn cross-currency deal, both of which attracted strong demand and initially traded well on the secondary markets.

However, sentiment shifted in July following reports that Meta was considering selling excess compute capacity, raising concerns about the durability of long-term demand and the risk of overbuild. This added to the existing unease around the hyperscaler bond supply pipeline, and potential “circular financing” dynamics in the sector. Alongside the broader weakness in AI-related equities, both Coreweave and Polar DC’s bonds sold off sharply, and are now trading at cash prices in the high 80s, versus initial pricing at par. 

The shift in tone created an immediate challenge for primary markets, leading to two Nordic HY data centre deals being pulled due to challenging conditions, with one opting instead for bank financing. Teething issues are to be expected as the European HY market races to get up to speed on a new and structurally complex sector, and as banks test how different structures will be received by a new investor base. Meanwhile, valuations are challenging due to a limited universe of comparable bonds, ongoing volatility, and as credit ratings seem to provide little anchor for yields. Coreweave’s euro bond, for example, trades around 100 basis points (bp) wide of the euro B- corporates curve, despite its B+ rating.  

Not all new issuance has come under pressure. BlackRock's Sopaipilla deal, for example, came to the market this week to fund a data centre project in Texas and backed by Meta, priced at a generous discount to the rating and has outperformed significantly on the secondary market, now trading at a cash price of around 103.

There is much to like about data centre deals, which offer exposure to a pool of scarce, infrastructure-like assets with high technical barriers to entry. Many transactions benefit from long-term contracts with strong IG counterparties such as Amazon and Google, often structured as “take-or-pay” contracts where the tenant must pay a pre-agreed fee regardless of usage, providing a high degree of revenue visibility.

However, these strengths are balanced by material risks. Construction risk is a key consideration, where projects can be cash flow negative for as long as four years, and only start generating full revenues upon completion. Therefore, guarantees must be in place to ensure project completion in the event of cost overruns and delays.

HY data centre deals have exhibited significant variation so far. Some have been structured as project finance debt where investors have direct claims over certain properties, and others would be issued at the holding company level, offering broader diversification but weaker asset-level protection. Tenant quality also varies, with the hyperscalers generally viewed as the strongest counterparties, compared to the neoclouds such as Coreweave, which typically have lower credit ratings and where demand trends are viewed as more speculative. Funding mix is also a key consideration, and is an area where Morgan Stanley highlighted increasing levels of dispersion in terms of Loan-To-Cost (LTC) ratios for the most recent cohort of deals versus those issued in 2025. 

Getting to grips with this sector will be increasingly important for investors as data centre bonds become a more meaningful component of the HY index, and by consequence a driver of performance. Morgan Stanley’s leveraged finance co-head William Graham recently predicted that AI infrastructure bonds will eventually represent the majority of annual non-investment grade new money supply.

As with any rapidly expanding sector, there will clearly be winners and losers, and increasing levels of dispersion in deal quality, reinforcing the need for careful credit selection. Selectivity across structure, sponsor quality, tenant strength and project fundamentals will be critical in identifying the most attractive opportunities. We believe sensitivity to broader AI sentiment suggests volatility will remain elevated as the sector continues to garner headlines, and where new supply shows no sign of abating.