Recent Securities and Exchange Commission guidance is underpinning the debt-fueled data center buildout to support artificial intelligence.
The tech sector is getting creative in its hunt for new capital, with AI chipmaker Nvidia entering $500 billion in partially backstopped agreements last week with private equity firms to support what they're calling a new "asset class" for computing power.
While data center securitizations have been around for years, the Nvidia announcement kicks it up to a new level, and the SEC has laid the groundwork in support of the rampup, legal specialists in the field told CNBC.
"Folks contemplating this transaction will be quite happy about the response from the SEC," Orion Mountainspring, a securitization attorney with Orrick, told CNBC late last week.
Last month, the SEC agreed with law firm Latham Watkins that some data center debt would be exempt from securitization rules that require investment sponsors to shoulder some of the risk of their investments.
"It gives them the opportunity over time to push down the required equity in the deal," Mountainspring said. "It's definitely good news for them."
Flexible, capital-efficient
B.K. Lee, an asset-backed security attorney at Alston & Bird, said the guidance could result in data center financing that is more "flexible and capital-efficient."
"It's good for sponsors in that it would reduce the kind of structured, rigid, prescribed ways of risk retention," he said.
Heads of the data center group at law firm Katten Muchin Rosenman said that the latest SEC guidance gets around Dodd-Frank regulations that were put in place after the 2008 financial crisis, which was ignited by securitizations of poorly underwritten residential mortgages.
Latham asked "the SEC to tell them that data center securitizations aren't [asset-backed securities] and therefore aren't subject to the risk retention rules under Dodd Frank," Seth Messner with Katten said. "The SEC basically agreed."
While it's not clear whether Nvidia's agreements with KKR, Apollo and other financial firms are designed specifically for securitization or other types of credit facilities, Messner said the guidance from the SEC sounds applicable to that situation.
"If they are planning to use securitization, and they are considering using Nvidia compute ⦠that sounds very similar to what Latham was describing," he said.
Staff opinion
The SEC guidance is only a staff opinion, as opposed to new rule-making or legislation. Nonetheless, attorneys say it will incentivize more data center financing by removing restrictions associated with a particular definition of asset-backed securities, known as Exchange Act ABS.
"It motivates the industry to create innovative ways to securitize data center revenues without the strict restrictions that Exchange Act ABS would impose," Lee at Alston & Bird said. Sponsors and their financial advisers should be more creative with how they structure deals as a result, he said.
Lee added that there will be more data center securitizations that fit the legal pattern outlined in the exchange between the SEC and Latham, "now that we have written guidance from the SEC."
Data center securitizations can avoid risk retention rules, in the eyes of the SEC and Latham, because they are not considered to be "self-liquidating assets," such as mortgages.
The SEC and multiple ratings agencies declined to comment.
