December 11, 2025 • 45 mins
Data centers are weird things. They're partly real estate assets. They're partly extremely advanced technological products. And they have to find a way to consume a tremendous amount of electricity from the grid -- or they increasingly have their own power plants on site. And beyond that, they've become extremely controversial, with more and more communities pushing back on their development. So how do you get all your ducks in a row when a new project is proposed? Who provides the financing at which stage of the agreement? What are the legal complications that arise? On this episode, we speak with Travis Wofford, a partner at the law firm Baker Botts, who works in the firm's AI practice. We discuss all the intricacies of these projects, the challenges that arise, and how things have changed in this space just since the beginning of the year.
Read more:
Oracle Earnings May Not Be Enough to Assuage Debt, AI Deal Fears
NextEra Shares Fall Amid Push to Move Into Data Centers and Gas
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Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots podcast.
Speaker 3 (00:21):
I'm Jill Wisenthal and I'm Tracy Alloway.
Speaker 2 (00:24):
Tracy, you know, we've obviously been doing a lot about
data centers, but one thing that's sort of becoming interesting
is they just seem so complicated. There are so many
different moving parts. And I don't mean like technically complicated,
although that's part of it, but they really are this
sort of weird thing where they're a high tech thing.
They have the most advanced chips, or at least some
of them have the most advanced.
Speaker 4 (00:42):
Chips in the world.
Speaker 2 (00:43):
They're real estate plays and we talk about securitization and
so forth, and then they have to figure out all
this stuff of how they're going to connect to the
grid and maybe they're going to build their own power
plant inside the data center, et cetera. There's a lot
of moving parts.
Speaker 3 (00:57):
Yeah, there's a couple of things here. So number one,
it does seem to be a complex space. And whenever
I think about how some of these things are being financed,
I get that, what's the meme with the guy standing
in front of the board with like all the papers
and directions. It all feels a little circular sometimes that
whole ecosystem. But the other thing is just the sheer
scale of the like financing requirement for doing this. So
(01:21):
I was reading a Morgan Stanley report. I think it
came out over the summer. They were forecasting two point
nine trillion of global data centers spend through twenty twenty eight.
And just for context, total CAPEC spending by all companies
in the S and P five hundred in twenty twenty
four was nine hundred and fifty billion.
Speaker 2 (01:39):
It's crazy, yeah, And by the words, are the numbers bug?
Speaker 3 (01:42):
Well? The other big question is if you actually stack
that up against existing revenue from generative AI, existing revenues
like sixteen billion, right, So there's a bit of a
gap there that needs to be filled.
Speaker 2 (01:53):
Right, completely correct. The other thing that strikes me is
very interesting and tricky is you have these projects and
put there's big capital outlay, capital commitments, et cetera. And
then the timelines like oh, when do you get connected
to the grid, When does that turbine for your insight
gas generator get actually get delivered? Maybe twenty thirty et cetera.
So it feels like, I get the pressure. You're dealing
(02:15):
with very uncertain timelines, and so how you establish that
in the language so everyone feels protected, Like, what if
you could ever get connected, what if anything could happen?
Speaker 5 (02:23):
Right?
Speaker 3 (02:23):
What are the expectations for when this actually starts to
pay off.
Speaker 2 (02:26):
When does it payoff, what are the obligations of the tenant,
et cetera. We don't really know anyway, I'm sure it's
different number one, So many more questions for just scratching
the surface.
Speaker 3 (02:36):
Yeah, absolutely, And you know, there have been some interesting
things happening. So a lot of the activity has been
done in the private market. But obviously AI players and
companies have a lot of different options. So they could
go to securitized markets, and I think we've been seeing
some CMBs and ABS deals there, private credit I mentioned
private equity bank lending, or they can go the public
(02:57):
route into corporate bonds, and so I'm really curious how
a lot of these players are choosing between those options.
Speaker 2 (03:03):
Well, I'm really excited to say we have the perfect guest,
someone who is really at the intersection of sort of
every one of the things that these data centers are
also at the intersection We're going to be speaking to
Travis Wafford. He's a partner at the law firm Baker Bods.
He is the chair of the corporate department based in Houston.
He works on all of these things. He can tell
us what's in the details of all these agreements. So, Travis,
(03:24):
thank you so much for coming on. Odd Love's great
to have you here in studio.
Speaker 4 (03:28):
Thanks for having me.
Speaker 2 (03:29):
What do you give us just a quick overview? What's
your role at Baker Boss? What do you focus on?
What do you call it a practice area? Is that
a legal for a legal term?
Speaker 5 (03:38):
Yeah, So I'm a deal lawyer. I help people build, buy, finance,
and sell projects and companies. And so we take multi
disciplinary teams and put them together in order to actually
make people's dreams. The reality is the way I like
to explain it. The idea is somebody comes to us
with a very complex project and they need an integrated solution,
(03:59):
legal solution to that problem. So you want to build
the data center, you've got power, you need people that
actually understand the air, the water, the interconnection with the fiber,
the interconnection with power, the land, everything else. And then
the finance layer on top of that we provide a
one stop shop for that.
Speaker 3 (04:18):
Okay, so my question is how busy are you right now?
Are you just getting you know, requests flying at you constantly?
Speaker 5 (04:25):
Yes, we are very busy, which is a good thing.
And it's a bad thing, right because your capacity constrain,
just like your clients are.
Speaker 3 (04:32):
Well, my husband is a former lawyer, so I know
how bad it can be.
Speaker 5 (04:36):
Yes, But the good thing is they're interesting deals. It's
interesting stuff to work on. It's in the news on
Bloomberg as well, and that makes it fun.
Speaker 2 (04:44):
It seems like a baker Bod's with like the long
history based in Houston, all the energy stuff. I mean,
this is all sort of novel to everyone, right, especially
the generative AI data center Like that aspect is just
a couple of years old. Can you talk about when
there is a new thing that everyone gets excited about
that maybe even a couple of years ago no one
was talking about now, granted, I know data centers a
(05:07):
lot longer than a couple of years old, but the
explosion of interest, how do you build that sort of
team that understands all of the dimensions so that you
could provide that one stop shop service.
Speaker 5 (05:18):
Yeah, so it's a really good question. And you know,
I always go back to the expression there's nothing new
under the sun. When you actually think about what we're doing.
You're building a power project, you're building out a data center,
the powered shell or the powered land or the like.
Speaker 4 (05:31):
People have been doing that before.
Speaker 5 (05:33):
When you're financing these we're actually using a lot of
the same financing structures. It may not be exactly the same,
but it rhymes. So ten twenty years ago we were
doing whole business securitizations of cell towers, that same securitization
technology you moved forward to residential solar, and now you're
moving that same thing forward to CNBS and ABS of
(05:55):
the data centers. So they're very similar. The rating agencies
are very familiar with these things. You have to look
at a few different variables and understand them slightly differently,
but particularly energy infrastructure and telecom infrastructure. Those are two
things that we've been doing for decades.
Speaker 3 (06:11):
Oh, walk us through the differences then between say, you
know a cell tower ABS or I don't know, a
solar power ABS versus a data center ABS or CMBs.
Speaker 5 (06:21):
Sure, so a cell tower ABS. Really when you're looking
at that, you just have the tower. It's on land.
You may have somebody that's coming along in order to
mow the lawn around it, but they don't have much
in terms of the actual equipment that's on top of
the cell tower. When you have a residential solar securitization,
you put the solar panel on top of somebody's roof.
(06:42):
You're contracting the cash flows off of that. Again, on
the cell tower, you're contracting the cash flows off of that.
You pull those together and then you put a bond
on top of it. With a data center securitization, what
you're doing there is you have the cash flow from
the data center lease. You have the cash flow from
other aspects of the business that may be going along
(07:03):
with that, like related to the power and some of
the additional services.
Speaker 4 (07:07):
You pool those. You have long term contracted.
Speaker 5 (07:09):
Cash flows, and then a rating agency can rate those
as well. But at the end of the day, you're
trying to make sure that you have a special purpose
vehicle that has all the assets that it needs within it.
You have an separate entity that's handling the billing and
the collection, an entity that's handling the operation and maintenance
of the asset, and that's supposed to be a standalone
(07:30):
product that can move at least the five to seven
years until you get to the anticipated payment date, and
often it's about a thirty year rated final maturity.
Speaker 3 (07:42):
So I have a question, and it's come up a
couple times on previous podcasts, but you mentioned, you know,
having a special purpose vehicle for this. Sure, Why does
it seem that so many big tech companies who are
in the AI space, who are presumably very, very cash
rich and profitable, why are so many of them financing
off balance sheet?
Speaker 5 (08:02):
They have better things to do with their money, so
the return on their invested capital is much better on
the tech side than it is on the infrastructure side.
Infrastructure is usually low margins, but the benefit with that
is it's long term, reliable, understood assets, such as again,
(08:23):
if you're doing a large energy project, or even the
poweredshell itself. It's land, it's a building, it's got the
fiber connection, it's got the power connection, and that's something
that can continue over a long period of time, Whereas
on the tech side, they make a lot more money
and have much greater margins, as we all.
Speaker 2 (08:40):
Know, right, So this aspect of the business, which could
be very profitable, but it's stable, it's very predictable. It's like,
let's outsource this, Let's have some other entity house that risk.
What are the risks in data center finance when you
think about the other side and not the tech companies,
but the lenders to the SPV and we'll talk about
thefferent structures that the credit form can take. What are
(09:03):
the risks? You know, it's a fairly stable, long term thing,
but how can things go wrong?
Speaker 5 (09:07):
So it depends on what exactly you're financing, right, So,
in a securitization and ABS, what you're doing is you
are financing the business of this PowerShell or turnkey solution.
The tenant quality is very important. Do I have somebody
that has the investment grade tenant quality or diversified pool
of high credit quality tenants who can actually be clear?
Speaker 3 (09:29):
You're securitizing the cash flows from the data center leases, right, yeah?
Speaker 4 (09:33):
So exactly.
Speaker 5 (09:34):
So on an ABS, it's a focus on the business
of this data center. The actual lease is in the securitization,
and then that the hard assets are in there as well,
and a CMBs you have the lease as well, but
it's more focused on the mortgage. And then we have
credit tenant.
Speaker 4 (09:52):
Leases as well, which are kind of directly to the tenant.
Speaker 3 (09:55):
That's useful, thank you.
Speaker 5 (09:56):
So risk associated with securitization are usually focus on the
tenant quality. They're focus on the term of the lease.
How long is the lease if you have a ten
or fifteen year lease. If you have a shorter term lease,
you're going to look a little bit more at well,
is this something that's going to need to be released
in that timeframe? What is the rate on the lease?
(10:18):
If it's a below market lease, it's much less likely
that somebody is going to want to get a new
lease and leave you. And then the facility itself. Is
the facility going to be able to withstand kind of
technology risk over a long period of time?
Speaker 3 (10:32):
So how are people structuring the deals at the moment
to compensate for that risk? So you have the time mismatch,
you have maybe tenancy rollover risk as well. Are people
like adding extra credit protection or how are they making
these palatable to investors?
Speaker 4 (10:48):
So one is.
Speaker 5 (10:50):
The loan to value your advance rate. So typically if
you're looking for something that's an investment grade securitization, you're
going to have it around forty to fifty percent. The
structure of the bond itself will have a rated final
maturity that's much further out than the lease, maybe twenty
five thirty years, but you're anticipating that the full principal
(11:12):
amount of the bond would be able to be repaid
within five to seven years. But the lease itself is
a ten year lease or a fifteen year lease, and
then that can get reapt for another ten years on
top of that. So when you're looking at your cash flows,
the cash flows are going to support your ard prior
(11:32):
to even worrying wait aird the anticipated repayment date of
the bond, prior to even worrying about your release.
Speaker 2 (11:40):
So one of the things that sort of like people
tweet about and people even write about, including us, that
we've talked about even this whole thing about GPU life
and some of these questions regarding the long term value
of the assets, and people like you know, like to claim, oh,
they're not as going to be as valuable long term
as people think. Does this come up in your work
(12:01):
and what's really going on?
Speaker 5 (12:03):
Sure, So it depends on what the financing structure is
that you're using. So the GPU life itself is more
question on a private credit story or an equity. On
the securitization side, they're more focused on the turnkey data
center itself. The useful life comes up a lot when
you're doing the accounting, and that rolls through to the
(12:24):
earnings per share of these public companies.
Speaker 4 (12:26):
You've got a useful life of a.
Speaker 5 (12:28):
Few years ago, it was three years for these GPUs.
Now some of them are using six years. If you're
doing straight line amortization over three years taken about a
third off over six years, it's obviously less than that,
and so you have much less amortization depreciation expense on it.
Speaker 4 (12:45):
That helps your ranks for sure.
Speaker 3 (13:03):
What's your impression of how private credit lenders have been
handling the GPU aging problem so far, Like, are they
conscious of it or are people still kind of basing
a lot of their expected cash flows off of GPUs
that last, you know, longer because they were previously being
used in cloud computing or something like that.
Speaker 5 (13:21):
Yeah, so they're very aware of it, particularly because if
you look at the new in video had the H
one hundreds and the H two hundreds that had come out.
Then it was the Blackwell the B one hundreds two hundreds,
and now Reuben's going to come after that, right, So
every two to three years you have these new chipsets
and that it's almost like, do I want to be
(13:44):
financing these laptops that you've got in front of me
for six years or seven years? What's the replacement cycle
on that? So when do I need to get repaid
on my debt? The interesting part that comes into it
is it's not just one laptop. We're talking about entire
data centers full of these things, and that's in the
(14:05):
tens hundreds of millions of dollars. So how are you
actually going to get your cash flow back when maybe
those aren't going to be used for training the same way.
The reality though, is the useful life of these and
the economic life is not just that initial usage.
Speaker 4 (14:23):
You can use it for other things.
Speaker 5 (14:25):
So starting out with training, needing to get trained done
as quickly as possible. If the data center is well
located in Virginia or another Tier one location, maybe there's
inference if it's close to a city or other location.
And then for the CPUs data centers that have those,
you can use them for compute and analytics and other
(14:48):
technologies and use cases that maybe that one what you
originally underwrote, but you knew that that was coming down
the line.
Speaker 2 (14:56):
Since you mentioned Virginia, can you talk about where we
are in twenty twenty five with data center siting and
picking locations. So I know that there's tons around northern Virginia,
and I know that there's some huge projects in the
middle of nowhere in Texas where they're not going to
offend any neighbors or whatever, etc. But what are the
big themes that companies are thinking about right now when
(15:17):
they think about location.
Speaker 5 (15:18):
Yeah. So one of the great things about Virginia is
connectivity to the subse cables, so getting to Europe, getting
to Africa, getting to other locations and the rest of
the United States. There's a great regulatory environment there in
terms of power, in terms of actually building out the
infrastructure there and other data centers so that you can
(15:41):
have I hate to use the word co located, but
connectivity within other data centers makes it very attractive. The
problem is it's saturated. It's a very saturated market. And
so if you want to build that next large giant
data center and you need power, or you need water,
or you need other parts of the infrastructure, and you
(16:02):
need to do it quickly, You're often going to look elsewhere.
That's one of the reasons that Texas and ur God
have become so attractive.
Speaker 1 (16:08):
Yeah.
Speaker 3 (16:08):
So one of the things we hear constantly is that
chips and financing are not necessarily the big choke points
for doing this. It's more the power. And I guess
I'm curious, is it really a power shortage problem or
is it more the distribution of power is not in
the places where these data centers you know, want to
be because of convenience, like colocation. It's you can say
(16:29):
both as well.
Speaker 5 (16:30):
Yeah, it definitely is both. I will say though that
with power its interconnection. It's getting that actual permission both
for the load, so the data center itself is drawing
power from the grid and for the generation and those
are two separate interconnections on these larger facilities that you're
going to be getting at relatively the same time. And
(16:52):
if you can't have both, then you're probably not going
to be able to support such a large facility. So
on the generationation side, if you're trying to get interconnection,
you go through a long process potentially with FURK and
with your ISO or rto you know, ERCOT if you're
in Texas to do typically at this scale, like the
(17:14):
large data center scale, like a five year process in
order to get that generation approved and interconnected, and.
Speaker 3 (17:22):
It's that's just the approval five years and then you
have to actually do the connection.
Speaker 4 (17:27):
Yeah, and then you got to build it.
Speaker 2 (17:28):
Wow.
Speaker 5 (17:29):
The fun part about that is that timeline. A lot
of people walk in and they think, oh, I've heard
that it's going to be eighteen to thirty six months
in order for me to get this done. And then
a month or two goes by and they get a
new date and it's been pushed out. And then a
few months go by and they get a new date
and it's been pushed out. And one of the analogies
we use is like you're waiting in the airport to
(17:51):
get on the plane.
Speaker 4 (17:52):
And they call I fly United all the time.
Speaker 5 (17:55):
They're like, oh, it's Global Services, okay, Global services, go forward,
and now armed services okay, armed services and people with
young children, and you just you realize that that first
class ticket that has you know, boarding group one, doesn't
mean that you're getting on first.
Speaker 2 (18:11):
Well, you all get there at the same time.
Speaker 4 (18:13):
At least.
Speaker 2 (18:13):
This is how I cause you know, I don't like
waiting there either, but I was like, you know what
I'm getting. I'm going to arrive at the destination the
same as all these people with children everything, So that's
hot anyway. You know, there was a story recently Core
we have one of the big neocloud companies sort of
lowered a growth forecast because of delay and the third
party data center project, which is exactly sort of what
(18:33):
you're talking about these things. How does that affect the
financing this uncertainty of when you can actually plug these
things in or when they're going to get approved, because
that sounds very frustrating and time is money, and so
how does that interact with the credit component?
Speaker 5 (18:49):
Yeah, so you kind of have three categories in the
timeline of one of these projects. You have your development
capital that's often equity funded. You have your construction but
also you get a big construction loan once you've got
your permits and your power, and then after that's been completed,
then you do your takeout finance. Okay, that maybe the securitization.
Speaker 3 (19:10):
And the like.
Speaker 2 (19:10):
Has the regulatory I guess political environment does it feel
like it's significantly changed in the last six months, So
you talk about like, you know, very few people were
talking about water. My impression is that the water component
specifically is very overrated based I think, except right, But
it obviously is a matter. But you know, the public
is really concerned about water. The public is clearly concerned
(19:31):
about electricity prices. People are showing up to town halls
to protest or to voice their opposition to new data
center projects in the areas where they live. Does it
feel like the environment today when we're talking in December
twenty twenty five, is meaningfully different than it was at
the start of the year in terms of public awareness
of all this stuff.
Speaker 5 (19:48):
So politically, absolutely right. I think that the community organizers,
and there are a lot of organizations that kind of
make their money based on outrage around these types of things,
they've realized that this this is a great.
Speaker 4 (20:00):
Opportunity for them.
Speaker 5 (20:01):
And if you look at the sustainability reports of a
lot of the hyperscalers and others, they talk about being
water positive. It doesn't mean that they're just happy about water.
It means that they're actually trying to have a positive impact,
and they'll start putting money into the water sheds and
the like and water replacement and that actually is really meaningful.
Is a part of the story that I think a
(20:22):
lot of the folks that are thinking about the political
aspect of this don't realize, which is when these data
centers come in and the balance sheets of these hyperscalers
come into an area that's largely been overlooked.
Speaker 4 (20:34):
You know, it's that.
Speaker 5 (20:35):
New Yorker magazine cover where you know you're looking from.
Speaker 2 (20:39):
The Manhattan and then it's California, right Exactly.
Speaker 5 (20:43):
A lot of these areas are underinvested, particularly in infrastructure,
and a hyperscaler comes in and starts saying, well, you know,
this water treatment facility isn't sufficient, we need to build
it out. That's very meaningful part of that interconnection study
that we're doing. You're looking at the electric trans mission
of the area. That is very meaningful. But water for
(21:04):
the developer, it's not a problem unless it's actually a problem.
What I mean by that is we have a lawyer
on several lawyers on staff that focus on water, and
one of them, for example, knows all ninety eight water
districts in Texas and knows which one you are supposed
to go to if you want to get your project
done quickly and which one to avoid. That's something that
(21:27):
if you mess it up, could really affect your timeline.
Speaker 3 (21:30):
Wait now, I'm really curious what would make one water
destination more attractive versus the one you want to avoid.
Is it just regulatory hurdles or is it like quality
of the water.
Speaker 5 (21:40):
So it's not quality of the water. You know, if
it's pottable water, it's pottable water. It's both water supply
and then water off take. So one of the issues
in oil and gas and Texas that they've had is
where do we get all the water?
Speaker 4 (21:53):
And what are we doing with all of this wastewater.
Speaker 5 (21:55):
It's the exact same thing with data centers. Obviously they're
putting different chemicals into the water in order to put
it into the facility, but it's still a chemically treated
water that has to be processed before it can go
back either into the drinking supply or into the rivers
and streams.
Speaker 2 (22:11):
And so, just back to the political environment, like what's
that doing on the ground today, This big change that's
occurred because everyone's up in arms about all this stuff,
how is that affecting some of the project planning that
exists today.
Speaker 5 (22:24):
So I think that the developers have been very mindful
in the past, but they're even more so now because
of the sensitivity around it. In certain states, they are
considering proposals that might involve moratoriums on data centers. That's
not the case in taxas. If you look at what
Governor Abbott and the legislature have been doing, they're pushing
a more data centers, more tax incentives, more infrastructure. I
(22:48):
think Virginia and several other places realize how important it
is to their economies as well and to their tax
base because data centers produce a lot of tax revenue
for these states, which go to help fund.
Speaker 4 (22:59):
Schools in the laws.
Speaker 3 (23:00):
Is anyone talking about public private partnerships in the data
center context. I feel like this is something that comes
in waves. People start getting really really excited about, like
public private partnerships for infrastructure build out, and then you
don't hear about it for like five years, and then
it comes back. Are we in one of those waves
right now when it comes to data center spend or not?
Speaker 5 (23:20):
Really? Yes, So I'm thinking about what I can say.
So the short answer is yes, those are being explored.
They're both from the perspective of public private partnerships, but
also from the perspective of like the Department of Energy
Loan Program Office and right you worked on TARA are
the others. Yes, they can provide financing support and the
Department of Energy has been very vocal about what the
(23:43):
Loan Program Office offers. The Department of Defense, Department of War,
I guess now also has programs that they can make available.
Some of these are actual grants, some of them are loans,
but separated apart from that, there's loan guarantees and so
you have a backstop by the federal government of a
loan that Let's be honest, if you're at forty percent
(24:06):
loan to value and you've got investment grade tenant that's
going to be paying the lease longer than the term
of the bond, do you really need it? Probably not,
but it can help lower the cost of capital anyway.
Speaker 2 (24:18):
Actually say more about that because we did several episodes.
We've done several episodes about the idea of loan guarantees
or particularly the Loan Program's Office. Well, but from the
private side, like talk to us about how that functionally
turns into Okay, we're going to get a better credit rating,
or this is going to crowd in private capital. As
they like to say, what happens, what is the steps
(24:38):
via which the government's role suddenly unlocks this finance.
Speaker 5 (24:42):
I think in all credit, when you're trying to underwrite
any kind of loan, you want to see what are
the cash flows or what's the collateral? And am I
going to get paid back? What's the likeliod right? And
one of the things that the frameworks I think are
show me who you walk with, and I'll show you
who you are.
Speaker 4 (24:59):
Right.
Speaker 5 (25:00):
Fine, if you have the United States government that is
providing a backstop, then I can be.
Speaker 4 (25:05):
Confident I'm going to get paid back.
Speaker 5 (25:07):
If it's Microsoft or Google or another who's providing a
guarantee on a project or the loan, then I'm very
comfortable that I'm going to get paid back. When you
put these types of things together, that means I don't
have to charge you an extra incremental amount to protect
me from that credit risk, and that extra money that
(25:29):
you keep in your pocket you can then turn into
additional projects and it's a velocity of money concept.
Speaker 3 (25:37):
I want to go back to private credit for a second, because,
as you mentioned earlier, a lot of these deals have
been done in the private credit space so far, and
companies have a lot of options when it comes to financing.
As I mentioned in the intro, they can go the
public route, they can securitize, they can go to private credit.
And whenever people talk about private credit in the context
of AI, they always say vague things like, oh, provides
(26:00):
customizable financing options and stuff like that. What exactly is
the attraction of private credit for data centers and AI
build out.
Speaker 5 (26:10):
So one of the most attractive things that private credit
can but doesn't always offer, is nondluted capital. Right, equity
is diluted, and equity is very expensive. There's that risk premium.
Speaker 4 (26:22):
That's associated with it.
Speaker 5 (26:23):
Private credit, there is an assumption in the story that
because of the extra protections that they receive, they don't
need the same equity risk premium. So a lot of
them are looking at maybe a fifteen percent IRR. They
might charge you ten to twelve percent up front, but
then because of the moint that basically their minimum return
(26:45):
on the capital that they'll get paid or an IRR
premium over time in the takeout, then they'll have a
catch up on the back end the equity they're taking
a percentage of what you at the end of the
day are going to get, and it's usually a much
more expensive piece private credit.
Speaker 2 (27:01):
But what about private credit versus other forms of credit
like bank lending or the public bond market.
Speaker 4 (27:06):
Well, can you get it?
Speaker 2 (27:07):
Well, I mean that's I mean, what is that's a
I don't know.
Speaker 5 (27:10):
The underwriting standards for private credit can be riskier than
what you would have from you know, a bull bracket
bank's credit desk.
Speaker 3 (27:34):
So when it comes to tenant diversification in data centers,
how is that judged and evaluated and priced? Because if
I think about who's you know, using a data center,
correlation is hard to measure at the best of times.
And if I think about, you know, like a new
business that's growing and everyone is suddenly using it, it
feels like the kind of thing that could end up
(27:56):
being very correlated as opposed to diversified.
Speaker 5 (27:59):
So when you are thinking about larger investment grade bonds
and debt in data centers, normally you are thinking about
wholesale data centers where there's one tenant that has that facility,
and that tenant has investment grade credit qual it's much
(28:20):
less likely that you are going to have a pool
of non investment grade tenants in a kind of co
location style data center, and then because of that, Fitch
or S and P or Kroll is going to give
you this investment grade rating. So I don't think that
the expectation should be that you're going to get a
(28:42):
investment grade rating on a pool of non investment grade tenants,
at least not right now. I think that eventually, when
you've got thousands of tenants across hundreds of data centers,
that becomes much more attractive.
Speaker 4 (28:54):
It's just not really where the market is right now.
Speaker 2 (28:57):
We did an episode a few months ago in September
actually where we're talking to this guy, Don Wilson in
Chicago who setting up a futures trading firm for GPUs
and theoretically it can hedge your GPU costs. As you
think about the industry going forward, could you see that
being a useful instrument for data center financing. Where I'm
a little concerned about is the value of this collateral goodness, name,
(29:20):
I want to hedge the GPU exposure. Could you see
over time maturing and debt being a valuable thing.
Speaker 5 (29:26):
I love new finance tools. I think that that kind
of creativity is really important. There's always an opportunity there
that The thing I have noticed with the data centers,
just with other asset classes, is that there's always a
cash flow stream that is not being utilized. And so
for example, if you have a securitization you're or really
(29:49):
any bond, you're not necessarily going to get credit for
everything in it. So your contracted cash flows, if that
counter party is an investment grade, may not get an
advance rate a loan to value on that. Somebody else
should be there in order to take advantage of that
and provide you with additional capital that you can then
(30:10):
reinvest into development.
Speaker 3 (30:12):
So last week we had a big outage at the
CME and futures were basically frozen for like ten hours
or something, and this was because of an issue at
one of the CME's data centers, which is operated by
a company called cyrus One. Is there a reputational or
operational risk that either deal structures or investors need to
(30:32):
be aware of when it comes to these financing arrangements.
Speaker 5 (30:35):
Reputational or in what regards so well.
Speaker 3 (30:38):
For instance, if cyrus one has a big melt down
at one of their data centers which seems to have
happened because one of their cooling centers reportedly malfunctioned. Is
that something that then gets priced into the financing arrangement
or is that something that investors should be concerned about.
Speaker 5 (30:56):
So these are definitely things that investors underwright too. So
if you are a blue chip operator and developer, you
are going to have a lower cost of capital than
you would otherwise. There are a lot of Johnny cum
Lateli's into data centers over the last two years, since
AI has really come to the forefront. The people that
(31:19):
have been doing it for a decade, they know what
they're doing and they're very good at it. And that
doesn't mean that there aren't going to be problems. Things
blow up sometimes.
Speaker 3 (31:28):
Squirrels, two wires, yeah, hopefully not subsea ones.
Speaker 5 (31:33):
There are accidents all the time, but that's part of
why you have these pretty incredible engineering studies that are
done in order to actually put these things together, and
freak accidents happen, and you know, that's part of the
credit risk.
Speaker 2 (31:49):
We just compared to other sort of real estate plays,
is there more sort of I guess, operational risk in
a data center than in other times? You know, we're
just some sort of retail distribution facility. I imagine the
sort of operational risk isn't going to be as great
and something like that.
Speaker 5 (32:07):
Yeah, so that's part of why they have these service
level agreements within the data centers themselves, where the operator
is agreeing to provide an uninterruptible, non intermittent power. That's
one of the big things that people focus on. And
how do the terms of that contract work and what
are the backstops. You could have a reserve account associated
(32:30):
with it so that if there are payments that are
necessary to be made, that there's just cash sitting there
ready to go. Normally, people are thinking that that would
reduce the cash flow on the bond, and that would
reduce at the end of the day, the equity distribution coming.
Speaker 4 (32:45):
From the SPV as opposed to affecting the payment on
the bond.
Speaker 3 (32:50):
That reminds me, actually, are you seeing a big surge
and demand for data center insurance or for people you
know who want to ensure not just against operational risks,
but cyber risk and things like that.
Speaker 4 (33:02):
Yes.
Speaker 5 (33:03):
So one of the wonderful things about any kind of
economic activity is that the insurance market is always there.
Speaker 4 (33:08):
To support it.
Speaker 3 (33:10):
Like the lawyers as well.
Speaker 5 (33:11):
Right, yeah, definitely give us a call.
Speaker 4 (33:13):
Right.
Speaker 5 (33:14):
The reality though, is there are products that data centers
have had for decades, and then there are new risks
that are coming up just because of how AI training works.
You can always go to Lloyd's of London in order
to get a specific policy if necessary, But for the
most part, these are risks that have already been priced in,
and there are products that are already there. Now there's
(33:34):
talk of well, there are products that exist in terms
of getting an insurance product to handle your technology risk.
So does the product work at the end of the
day or does it become obsolete too quickly? That looks
more like a bet, almost as opposed to a real
insurance policy.
Speaker 4 (33:53):
But it's something that can be underwritten.
Speaker 2 (33:55):
How valuable it is just having a plug into the grid,
you know, I'm thinking about are those various deals of
companies wanting to buy bitcoin mining operations, for example, and
it seems like you know what, yeah, maybe you can
make a little money mining bitcoin, but you have you
have access to twenty four to seven reliable power. That's
a lot more valuable than what's going on inside the
(34:17):
shell here. Talk to us just about that value of
anyone who has access to power.
Speaker 5 (34:21):
So powered land is huge and that is developing. You know,
it's existed for a while, but is becoming more and
more important because there are rets and real estate developers
who don't need to have the sophistication of can I
do the new direct to cooling technology for a powered
(34:41):
shell or turnkey solution. I'm just going to have land
and I'm going to make sure that there's sufficient power
here for you to build your data center or for
you to bring your GPUs into. That's attractive if you
listen to the earnings calls of several of the real
estate developers, they're moving into that if they have an already.
Speaker 2 (35:00):
So their job is they're just going to secure land
that they can that they know they can get power too.
Speaker 5 (35:05):
So they've already got like they've got that right. So
the interesting part is there's so many different projects over
the last several decades where they've been working through interconnection
studies for the land for you name it project, and
they're waiting years and years just like everybody else, in
order to get those done. Well, why use it for
this when we can use it.
Speaker 4 (35:26):
For that and data centers?
Speaker 5 (35:28):
You can make a lot more money on it.
Speaker 3 (35:30):
Isn't the obvious solution to the power problem just for
the big guys to build their own power system and
maybe spend a little bit more money plugging it into
the grid. Again, if political pushback is becoming an issue,
or if regulators are worried about this, shouldn't they just
do it on their own? Is that the straightforward thing
to do.
Speaker 5 (35:49):
The hyperscalers themselves. I think that goes back to what's
the best use of their capital. They're not in the
infrastructure business specifically, though, I will say if you look
at Love, Amazon is an example. They sold books, they
had the website, they needed to expand, so they build
Amazon Web services. They need a distribution.
Speaker 4 (36:09):
They've got that.
Speaker 5 (36:10):
Tech companies have been becoming energy companies for years. Energy companies,
we know, had to become tech companies a decade ago
in order to just keep up. But now there's this
integration that's happening from both sides, both in terms of
what's happening in our operations but the ownership itself.
Speaker 2 (36:29):
Just going back to powered land for a second, So
what you're saying is that there are these developments that
have been going on a long time, but they initially
planned for something else, But that today in twenty twenty five,
is they're getting closer to when they could be connected.
Maybe AI is you know, this connection is a lot
more valuable for an AI data center.
Speaker 4 (36:49):
Absolutely, so this is interesting.
Speaker 2 (36:50):
See this to me, like, the only reason I go
back to this is because one of the things that
when people talk about an AI bubble, if there is one,
is this idea of crowding out other productive use of
the economy. Right, are there better things in the long
term that we could have done with these turbines? Are
there better things that we could have done with these
electrical connection systems, et cetera. And other companies might have
(37:11):
been waiting on some piece of gear and the AI
data center outbid them, And I'm going to I'm not
asking you like this sustainable, but there are other things
that are going to lose out or not have access
to electricity that people wanted to do but aren't going
to because that wire is more valuable for an AI.
Speaker 4 (37:28):
Company one hundred percent.
Speaker 5 (37:29):
Think about the actual interconnection queue two and a half
years ago, before AI became a big deal, there was
I want to say, twenty six hundred gigawatts in the
interconnection queue, and we were expecting eighty percent of that
would never actually be constructed. Only twenty percent of it would.
And that's pretty typical even on a going forward basis,
(37:53):
what are you going to do with those projects and
that land that has already started in a process of
interconnections that he is and the like, Well, you can
shift that to data centers, especially because a lot of
that you were producing solar batteries, wind and other power
gen Now you add on the data center layer to it.
(38:13):
And what may not have been economic before now is.
Speaker 3 (38:17):
Should I build a data center?
Speaker 2 (38:18):
Joe, Yeah, I've.
Speaker 3 (38:19):
Got a grid connection, I've got a water Yeah, there
we go. Okay, next project all lots builds a data
center in protected land in Connecticut?
Speaker 6 (38:29):
Probably not actually, So this sort of piggybacks on a
question that Tracy as already. But why not just for
you know, these is companies, particularly the hyperscalers that look
out in the environment and there's all these people showing
up at meetings complaining about the water et cetera like that,
Why isn't the future just entirely behind the meter in
(38:52):
Texas where it's like we're just gonna.
Speaker 1 (38:53):
Build it all.
Speaker 2 (38:54):
We're gonna have the natural gas plant on site. We're
never gonna bother with the grid. We're never gonna We're
just gonna have the plan right there. Why isn't that
just the entire future of data center?
Speaker 5 (39:03):
One of the issues with behind the meter is what
if the data center goes away? So, for example, what
if Mark Zuckerberg one day decides I'm not doing the
metaverse anymore and somebody in AI says I'm not doing AI,
or we move from GPUs to quantum.
Speaker 4 (39:22):
Computing or something like that.
Speaker 5 (39:24):
You want to have that generative capacity interconnected with the
grid so that you don't have a stranded asset.
Speaker 3 (39:30):
Okay, oh yeah, stranded assets. There's a word I haven't
heard of you.
Speaker 1 (39:34):
Yeah, I know.
Speaker 2 (39:35):
So just looking forward and I mentioned earlier core Weave
saying okay, there is a delay and some of it's
build out. What are the big choke points and do
you expect them to stack up? We recently did an
episode with a Travis Cavula Energy and he was like,
I don't know, like the amount of just the sheer
amount that we're adding to the grid, Like it's gonna
(39:56):
be tough and I don't know how it's all going
to pan out for some of these projects, but what
do you see as the sort of big bottle extra
choke points that you're thinking about in the coming years.
Speaker 5 (40:04):
So power continues to be the number one bottle, like
I don't think anybody would dispute that. Water obviously is
an issue as well. Getting the turbines and getting what
you actually need in order to produce power is very difficult.
I do think though, that when you look at how
some of these interconnection requests are prepared, you have five
(40:27):
or ten different people making applications for the exact same project,
So it inflates what the expectations are on the number
of projects in the market at a given time. When
you get rid of all of that extra wash, you
wind up with hyperscalers, large enterprises, and other real investment
(40:49):
grade or serious tenets. Give you projects that can get done.
That's infrastructure, that's infrastructure grade, and a lot of the
speculative assets those are power points. They probably are not
going to get made, particularly if there's any kind of
economic shock later.
Speaker 2 (41:05):
Travis Watford, thank you so much for coming on OUTLAS.
It was great.
Speaker 3 (41:08):
Thank you, Thank you so much.
Speaker 2 (41:10):
Appreciate it, Tracy. I thought that was really helpful, really
clarified a lot of things for me. I'm trying to think,
Like the point about the sequencing of the financing, I
(41:32):
thought was really interesting or very important to help me
understand these things, because in my mind, I'm like, well,
they're going to lose so much money. They're breaking ground
on all these deals. What if they don't actually get
implemented because you're waiting forever? And so you're hearing him
describe the sequencing of different financing at different stages, like,
all right, well, at least that makes sense to me.
Speaker 3 (41:50):
Yes, I still feel like there's kind of a mismatch issue.
Speaker 2 (41:54):
Sure, well, it.
Speaker 3 (41:55):
Just feels like, you know, you're talking about a a
technology that has like its own upgrade risk. Let's say,
like you know, people are developing new chips pretty fast,
and you don't know when the next one is coming
down the line and when you might want to replace
all your chips with something else. So that's one thing
tendency rollover risk. I know he pushed back a little
(42:16):
bit on the diversified point, but again, my understanding is
for a lot of the ABS structures, maybe CMBs as well,
diversification is part of the proposal, and I think he
mentioned it earlier, and that seems difficult to me to
accurately measure. If you have a bunch of tenants all
you know, doing something in the cloud, drawing something from
(42:36):
a data center, if there's a big macroeconomic downturn or
something like, who's to say that they're not all going
to renig on their lease at once.
Speaker 2 (42:44):
The levels of uncertainty yah, seems so extreme because you're
talking about, Okay, there's the economic downturn. There's the fact
that maybe a lot of this AI stuff could completely
fizzle out and doesn't produce even in normal times. Then
there's the technological questions. Then there's the operational questions about
are you actually good at operating and building a data center?
(43:06):
Not everyone who's gonna be the same, And then there's
the grid interconnection and all of these things about like
reliability of power, et cetera. So it feels like, yes,
on the one hand, I'd very much buy that on paper. Yes,
you know, this is the twenty twenty five iteration of
what used to be cell towers or what used to
be rooftop solar or anything else. But with just an.
(43:29):
I mean he mentioned with the cell tower for example,
if one guy whose job is to mow the lawn, right,
that's like that's the sort the like operational component. I
get the you know, most of the time the tower
is just there, right, and you have to make sure
that it's in it's safe area, et cetera. But the
(43:49):
degree of complexity, of operational complexity, of technological energy complexity
for these it just seems like exponentially higher.
Speaker 3 (43:55):
Yeah, And I keep thinking back to just the sheer
scale of it, and like thebers that got thrown around
literally trillions of dollars. In the next few years. Well,
I'm sure we'll do more episodes on it.
Speaker 2 (44:06):
There are so many sub episodes we could do, including
how the best of the Texas is ninety eight water
districts and how you find.
Speaker 3 (44:14):
We No, no, no, Joe, you know what sub episode we
could do?
Speaker 2 (44:17):
Subse cables we got to do. We didn't get into that,
but we should do an an Yeah, well we should
do more subs cable episode. And actually just in terms
of data center siting, like access to you know, latency
risk and where it needs to be, et cetera. It's
something we should talk about more.
Speaker 3 (44:35):
Shall we leave it there?
Speaker 4 (44:36):
For leave it there?
Speaker 3 (44:37):
This has been another episode of the Odd Thoughts podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 2 (44:42):
I'm joll Wisenthal. You can follow me at the Stalwart.
Follow our producers Kerman Rodriguez at Carman Arman Dashel Bennett
at Dashbot and kill Brooks at kill Brooks. For more
odd Laws content, go to Bloomberg dot com slash odd
Lots with the daily newsletter and all of our episodes
and you can shed about all these topics twenty four
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Speaker 3 (45:03):
And if you enjoyed this conversation, if you want us
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And remember, if you are a Bloomberg subscriber, you can
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Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots podcast.
Speaker 3 (00:21):
I'm Jill Wisenthal and I'm Tracy Alloway.
Speaker 2 (00:24):
Tracy, you know, we've obviously been doing a lot about
data centers, but one thing that's sort of becoming interesting
is they just seem so complicated. There are so many
different moving parts. And I don't mean like technically complicated,
although that's part of it, but they really are this
sort of weird thing where they're a high tech thing.
They have the most advanced chips, or at least some
of them have the most advanced.
Speaker 4 (00:42):
Chips in the world.
Speaker 2 (00:43):
They're real estate plays and we talk about securitization and
so forth, and then they have to figure out all
this stuff of how they're going to connect to the
grid and maybe they're going to build their own power
plant inside the data center, et cetera. There's a lot
of moving parts.
Speaker 3 (00:57):
Yeah, there's a couple of things here. So number one,
it does seem to be a complex space. And whenever
I think about how some of these things are being financed,
I get that, what's the meme with the guy standing
in front of the board with like all the papers
and directions. It all feels a little circular sometimes that
whole ecosystem. But the other thing is just the sheer
scale of the like financing requirement for doing this. So
(01:21):
I was reading a Morgan Stanley report. I think it
came out over the summer. They were forecasting two point
nine trillion of global data centers spend through twenty twenty eight.
And just for context, total CAPEC spending by all companies
in the S and P five hundred in twenty twenty
four was nine hundred and fifty billion.
Speaker 2 (01:39):
It's crazy, yeah, And by the words, are the numbers bug?
Speaker 3 (01:42):
Well? The other big question is if you actually stack
that up against existing revenue from generative AI, existing revenues
like sixteen billion, right, So there's a bit of a
gap there that needs to be filled.
Speaker 2 (01:53):
Right, completely correct. The other thing that strikes me is
very interesting and tricky is you have these projects and
put there's big capital outlay, capital commitments, et cetera. And
then the timelines like oh, when do you get connected
to the grid, When does that turbine for your insight
gas generator get actually get delivered? Maybe twenty thirty et cetera.
So it feels like, I get the pressure. You're dealing
(02:15):
with very uncertain timelines, and so how you establish that
in the language so everyone feels protected, Like, what if
you could ever get connected, what if anything could happen?
Speaker 5 (02:23):
Right?
Speaker 3 (02:23):
What are the expectations for when this actually starts to
pay off.
Speaker 2 (02:26):
When does it payoff, what are the obligations of the tenant,
et cetera. We don't really know anyway, I'm sure it's
different number one, So many more questions for just scratching
the surface.
Speaker 3 (02:36):
Yeah, absolutely, And you know, there have been some interesting
things happening. So a lot of the activity has been
done in the private market. But obviously AI players and
companies have a lot of different options. So they could
go to securitized markets, and I think we've been seeing
some CMBs and ABS deals there, private credit I mentioned
private equity bank lending, or they can go the public
(02:57):
route into corporate bonds, and so I'm really curious how
a lot of these players are choosing between those options.
Speaker 2 (03:03):
Well, I'm really excited to say we have the perfect guest,
someone who is really at the intersection of sort of
every one of the things that these data centers are
also at the intersection We're going to be speaking to
Travis Wafford. He's a partner at the law firm Baker Bods.
He is the chair of the corporate department based in Houston.
He works on all of these things. He can tell
us what's in the details of all these agreements. So, Travis,
(03:24):
thank you so much for coming on. Odd Love's great
to have you here in studio.
Speaker 4 (03:28):
Thanks for having me.
Speaker 2 (03:29):
What do you give us just a quick overview? What's
your role at Baker Boss? What do you focus on?
What do you call it a practice area? Is that
a legal for a legal term?
Speaker 5 (03:38):
Yeah, So I'm a deal lawyer. I help people build, buy, finance,
and sell projects and companies. And so we take multi
disciplinary teams and put them together in order to actually
make people's dreams. The reality is the way I like
to explain it. The idea is somebody comes to us
with a very complex project and they need an integrated solution,
(03:59):
legal solution to that problem. So you want to build
the data center, you've got power, you need people that
actually understand the air, the water, the interconnection with the fiber,
the interconnection with power, the land, everything else. And then
the finance layer on top of that we provide a
one stop shop for that.
Speaker 3 (04:18):
Okay, so my question is how busy are you right now?
Are you just getting you know, requests flying at you constantly?
Speaker 5 (04:25):
Yes, we are very busy, which is a good thing.
And it's a bad thing, right because your capacity constrain,
just like your clients are.
Speaker 3 (04:32):
Well, my husband is a former lawyer, so I know
how bad it can be.
Speaker 5 (04:36):
Yes, But the good thing is they're interesting deals. It's
interesting stuff to work on. It's in the news on
Bloomberg as well, and that makes it fun.
Speaker 2 (04:44):
It seems like a baker Bod's with like the long
history based in Houston, all the energy stuff. I mean,
this is all sort of novel to everyone, right, especially
the generative AI data center Like that aspect is just
a couple of years old. Can you talk about when
there is a new thing that everyone gets excited about
that maybe even a couple of years ago no one
was talking about now, granted, I know data centers a
(05:07):
lot longer than a couple of years old, but the
explosion of interest, how do you build that sort of
team that understands all of the dimensions so that you
could provide that one stop shop service.
Speaker 5 (05:18):
Yeah, so it's a really good question. And you know,
I always go back to the expression there's nothing new
under the sun. When you actually think about what we're doing.
You're building a power project, you're building out a data center,
the powered shell or the powered land or the like.
Speaker 4 (05:31):
People have been doing that before.
Speaker 5 (05:33):
When you're financing these we're actually using a lot of
the same financing structures. It may not be exactly the same,
but it rhymes. So ten twenty years ago we were
doing whole business securitizations of cell towers, that same securitization
technology you moved forward to residential solar, and now you're
moving that same thing forward to CNBS and ABS of
(05:55):
the data centers. So they're very similar. The rating agencies
are very familiar with these things. You have to look
at a few different variables and understand them slightly differently,
but particularly energy infrastructure and telecom infrastructure. Those are two
things that we've been doing for decades.
Speaker 3 (06:11):
Oh, walk us through the differences then between say, you
know a cell tower ABS or I don't know, a
solar power ABS versus a data center ABS or CMBs.
Speaker 5 (06:21):
Sure, so a cell tower ABS. Really when you're looking
at that, you just have the tower. It's on land.
You may have somebody that's coming along in order to
mow the lawn around it, but they don't have much
in terms of the actual equipment that's on top of
the cell tower. When you have a residential solar securitization,
you put the solar panel on top of somebody's roof.
(06:42):
You're contracting the cash flows off of that. Again, on
the cell tower, you're contracting the cash flows off of that.
You pull those together and then you put a bond
on top of it. With a data center securitization, what
you're doing there is you have the cash flow from
the data center lease. You have the cash flow from
other aspects of the business that may be going along
(07:03):
with that, like related to the power and some of
the additional services.
Speaker 4 (07:07):
You pool those. You have long term contracted.
Speaker 5 (07:09):
Cash flows, and then a rating agency can rate those
as well. But at the end of the day, you're
trying to make sure that you have a special purpose
vehicle that has all the assets that it needs within it.
You have an separate entity that's handling the billing and
the collection, an entity that's handling the operation and maintenance
of the asset, and that's supposed to be a standalone
(07:30):
product that can move at least the five to seven
years until you get to the anticipated payment date, and
often it's about a thirty year rated final maturity.
Speaker 3 (07:42):
So I have a question, and it's come up a
couple times on previous podcasts, but you mentioned, you know,
having a special purpose vehicle for this. Sure, Why does
it seem that so many big tech companies who are
in the AI space, who are presumably very, very cash
rich and profitable, why are so many of them financing
off balance sheet?
Speaker 5 (08:02):
They have better things to do with their money, so
the return on their invested capital is much better on
the tech side than it is on the infrastructure side.
Infrastructure is usually low margins, but the benefit with that
is it's long term, reliable, understood assets, such as again,
(08:23):
if you're doing a large energy project, or even the
poweredshell itself. It's land, it's a building, it's got the
fiber connection, it's got the power connection, and that's something
that can continue over a long period of time, Whereas
on the tech side, they make a lot more money
and have much greater margins, as we all.
Speaker 2 (08:40):
Know, right, So this aspect of the business, which could
be very profitable, but it's stable, it's very predictable. It's like,
let's outsource this, Let's have some other entity house that risk.
What are the risks in data center finance when you
think about the other side and not the tech companies,
but the lenders to the SPV and we'll talk about
thefferent structures that the credit form can take. What are
(09:03):
the risks? You know, it's a fairly stable, long term thing,
but how can things go wrong?
Speaker 5 (09:07):
So it depends on what exactly you're financing, right, So,
in a securitization and ABS, what you're doing is you
are financing the business of this PowerShell or turnkey solution.
The tenant quality is very important. Do I have somebody
that has the investment grade tenant quality or diversified pool
of high credit quality tenants who can actually be clear?
Speaker 3 (09:29):
You're securitizing the cash flows from the data center leases, right, yeah?
Speaker 4 (09:33):
So exactly.
Speaker 5 (09:34):
So on an ABS, it's a focus on the business
of this data center. The actual lease is in the securitization,
and then that the hard assets are in there as well,
and a CMBs you have the lease as well, but
it's more focused on the mortgage. And then we have
credit tenant.
Speaker 4 (09:52):
Leases as well, which are kind of directly to the tenant.
Speaker 3 (09:55):
That's useful, thank you.
Speaker 5 (09:56):
So risk associated with securitization are usually focus on the
tenant quality. They're focus on the term of the lease.
How long is the lease if you have a ten
or fifteen year lease. If you have a shorter term lease,
you're going to look a little bit more at well,
is this something that's going to need to be released
in that timeframe? What is the rate on the lease?
(10:18):
If it's a below market lease, it's much less likely
that somebody is going to want to get a new
lease and leave you. And then the facility itself. Is
the facility going to be able to withstand kind of
technology risk over a long period of time?
Speaker 3 (10:32):
So how are people structuring the deals at the moment
to compensate for that risk? So you have the time mismatch,
you have maybe tenancy rollover risk as well. Are people
like adding extra credit protection or how are they making
these palatable to investors?
Speaker 4 (10:48):
So one is.
Speaker 5 (10:50):
The loan to value your advance rate. So typically if
you're looking for something that's an investment grade securitization, you're
going to have it around forty to fifty percent. The
structure of the bond itself will have a rated final
maturity that's much further out than the lease, maybe twenty
five thirty years, but you're anticipating that the full principal
(11:12):
amount of the bond would be able to be repaid
within five to seven years. But the lease itself is
a ten year lease or a fifteen year lease, and
then that can get reapt for another ten years on
top of that. So when you're looking at your cash flows,
the cash flows are going to support your ard prior
(11:32):
to even worrying wait aird the anticipated repayment date of
the bond, prior to even worrying about your release.
Speaker 2 (11:40):
So one of the things that sort of like people
tweet about and people even write about, including us, that
we've talked about even this whole thing about GPU life
and some of these questions regarding the long term value
of the assets, and people like you know, like to claim, oh,
they're not as going to be as valuable long term
as people think. Does this come up in your work
(12:01):
and what's really going on?
Speaker 5 (12:03):
Sure, So it depends on what the financing structure is
that you're using. So the GPU life itself is more
question on a private credit story or an equity. On
the securitization side, they're more focused on the turnkey data
center itself. The useful life comes up a lot when
you're doing the accounting, and that rolls through to the
(12:24):
earnings per share of these public companies.
Speaker 4 (12:26):
You've got a useful life of a.
Speaker 5 (12:28):
Few years ago, it was three years for these GPUs.
Now some of them are using six years. If you're
doing straight line amortization over three years taken about a
third off over six years, it's obviously less than that,
and so you have much less amortization depreciation expense on it.
Speaker 4 (12:45):
That helps your ranks for sure.
Speaker 3 (13:03):
What's your impression of how private credit lenders have been
handling the GPU aging problem so far, Like, are they
conscious of it or are people still kind of basing
a lot of their expected cash flows off of GPUs
that last, you know, longer because they were previously being
used in cloud computing or something like that.
Speaker 5 (13:21):
Yeah, so they're very aware of it, particularly because if
you look at the new in video had the H
one hundreds and the H two hundreds that had come out.
Then it was the Blackwell the B one hundreds two hundreds,
and now Reuben's going to come after that, right, So
every two to three years you have these new chipsets
and that it's almost like, do I want to be
(13:44):
financing these laptops that you've got in front of me
for six years or seven years? What's the replacement cycle
on that? So when do I need to get repaid
on my debt? The interesting part that comes into it
is it's not just one laptop. We're talking about entire
data centers full of these things, and that's in the
(14:05):
tens hundreds of millions of dollars. So how are you
actually going to get your cash flow back when maybe
those aren't going to be used for training the same way.
The reality though, is the useful life of these and
the economic life is not just that initial usage.
Speaker 4 (14:23):
You can use it for other things.
Speaker 5 (14:25):
So starting out with training, needing to get trained done
as quickly as possible. If the data center is well
located in Virginia or another Tier one location, maybe there's
inference if it's close to a city or other location.
And then for the CPUs data centers that have those,
you can use them for compute and analytics and other
(14:48):
technologies and use cases that maybe that one what you
originally underwrote, but you knew that that was coming down
the line.
Speaker 2 (14:56):
Since you mentioned Virginia, can you talk about where we
are in twenty twenty five with data center siting and
picking locations. So I know that there's tons around northern Virginia,
and I know that there's some huge projects in the
middle of nowhere in Texas where they're not going to
offend any neighbors or whatever, etc. But what are the
big themes that companies are thinking about right now when
(15:17):
they think about location.
Speaker 5 (15:18):
Yeah. So one of the great things about Virginia is
connectivity to the subse cables, so getting to Europe, getting
to Africa, getting to other locations and the rest of
the United States. There's a great regulatory environment there in
terms of power, in terms of actually building out the
infrastructure there and other data centers so that you can
(15:41):
have I hate to use the word co located, but
connectivity within other data centers makes it very attractive. The
problem is it's saturated. It's a very saturated market. And
so if you want to build that next large giant
data center and you need power, or you need water,
or you need other parts of the infrastructure, and you
(16:02):
need to do it quickly, You're often going to look elsewhere.
That's one of the reasons that Texas and ur God
have become so attractive.
Speaker 1 (16:08):
Yeah.
Speaker 3 (16:08):
So one of the things we hear constantly is that
chips and financing are not necessarily the big choke points
for doing this. It's more the power. And I guess
I'm curious, is it really a power shortage problem or
is it more the distribution of power is not in
the places where these data centers you know, want to
be because of convenience, like colocation. It's you can say
(16:29):
both as well.
Speaker 5 (16:30):
Yeah, it definitely is both. I will say though that
with power its interconnection. It's getting that actual permission both
for the load, so the data center itself is drawing
power from the grid and for the generation and those
are two separate interconnections on these larger facilities that you're
going to be getting at relatively the same time. And
(16:52):
if you can't have both, then you're probably not going
to be able to support such a large facility. So
on the generationation side, if you're trying to get interconnection,
you go through a long process potentially with FURK and
with your ISO or rto you know, ERCOT if you're
in Texas to do typically at this scale, like the
(17:14):
large data center scale, like a five year process in
order to get that generation approved and interconnected, and.
Speaker 3 (17:22):
It's that's just the approval five years and then you
have to actually do the connection.
Speaker 4 (17:27):
Yeah, and then you got to build it.
Speaker 2 (17:28):
Wow.
Speaker 5 (17:29):
The fun part about that is that timeline. A lot
of people walk in and they think, oh, I've heard
that it's going to be eighteen to thirty six months
in order for me to get this done. And then
a month or two goes by and they get a
new date and it's been pushed out. And then a
few months go by and they get a new date
and it's been pushed out. And one of the analogies
we use is like you're waiting in the airport to
(17:51):
get on the plane.
Speaker 4 (17:52):
And they call I fly United all the time.
Speaker 5 (17:55):
They're like, oh, it's Global Services, okay, Global services, go forward,
and now armed services okay, armed services and people with
young children, and you just you realize that that first
class ticket that has you know, boarding group one, doesn't
mean that you're getting on first.
Speaker 2 (18:11):
Well, you all get there at the same time.
Speaker 4 (18:13):
At least.
Speaker 2 (18:13):
This is how I cause you know, I don't like
waiting there either, but I was like, you know what
I'm getting. I'm going to arrive at the destination the
same as all these people with children everything, So that's
hot anyway. You know, there was a story recently Core
we have one of the big neocloud companies sort of
lowered a growth forecast because of delay and the third
party data center project, which is exactly sort of what
(18:33):
you're talking about these things. How does that affect the
financing this uncertainty of when you can actually plug these
things in or when they're going to get approved, because
that sounds very frustrating and time is money, and so
how does that interact with the credit component?
Speaker 5 (18:49):
Yeah, so you kind of have three categories in the
timeline of one of these projects. You have your development
capital that's often equity funded. You have your construction but
also you get a big construction loan once you've got
your permits and your power, and then after that's been completed,
then you do your takeout finance. Okay, that maybe the securitization.
Speaker 3 (19:10):
And the like.
Speaker 2 (19:10):
Has the regulatory I guess political environment does it feel
like it's significantly changed in the last six months, So
you talk about like, you know, very few people were
talking about water. My impression is that the water component
specifically is very overrated based I think, except right, But
it obviously is a matter. But you know, the public
is really concerned about water. The public is clearly concerned
(19:31):
about electricity prices. People are showing up to town halls
to protest or to voice their opposition to new data
center projects in the areas where they live. Does it
feel like the environment today when we're talking in December
twenty twenty five, is meaningfully different than it was at
the start of the year in terms of public awareness
of all this stuff.
Speaker 5 (19:48):
So politically, absolutely right. I think that the community organizers,
and there are a lot of organizations that kind of
make their money based on outrage around these types of things,
they've realized that this this is a great.
Speaker 4 (20:00):
Opportunity for them.
Speaker 5 (20:01):
And if you look at the sustainability reports of a
lot of the hyperscalers and others, they talk about being
water positive. It doesn't mean that they're just happy about water.
It means that they're actually trying to have a positive impact,
and they'll start putting money into the water sheds and
the like and water replacement and that actually is really meaningful.
Is a part of the story that I think a
(20:22):
lot of the folks that are thinking about the political
aspect of this don't realize, which is when these data
centers come in and the balance sheets of these hyperscalers
come into an area that's largely been overlooked.
Speaker 4 (20:34):
You know, it's that.
Speaker 5 (20:35):
New Yorker magazine cover where you know you're looking from.
Speaker 2 (20:39):
The Manhattan and then it's California, right Exactly.
Speaker 5 (20:43):
A lot of these areas are underinvested, particularly in infrastructure,
and a hyperscaler comes in and starts saying, well, you know,
this water treatment facility isn't sufficient, we need to build
it out. That's very meaningful part of that interconnection study
that we're doing. You're looking at the electric trans mission
of the area. That is very meaningful. But water for
(21:04):
the developer, it's not a problem unless it's actually a problem.
What I mean by that is we have a lawyer
on several lawyers on staff that focus on water, and
one of them, for example, knows all ninety eight water
districts in Texas and knows which one you are supposed
to go to if you want to get your project
done quickly and which one to avoid. That's something that
(21:27):
if you mess it up, could really affect your timeline.
Speaker 3 (21:30):
Wait now, I'm really curious what would make one water
destination more attractive versus the one you want to avoid.
Is it just regulatory hurdles or is it like quality
of the water.
Speaker 5 (21:40):
So it's not quality of the water. You know, if
it's pottable water, it's pottable water. It's both water supply
and then water off take. So one of the issues
in oil and gas and Texas that they've had is
where do we get all the water?
Speaker 4 (21:53):
And what are we doing with all of this wastewater.
Speaker 5 (21:55):
It's the exact same thing with data centers. Obviously they're
putting different chemicals into the water in order to put
it into the facility, but it's still a chemically treated
water that has to be processed before it can go
back either into the drinking supply or into the rivers
and streams.
Speaker 2 (22:11):
And so, just back to the political environment, like what's
that doing on the ground today, This big change that's
occurred because everyone's up in arms about all this stuff,
how is that affecting some of the project planning that
exists today.
Speaker 5 (22:24):
So I think that the developers have been very mindful
in the past, but they're even more so now because
of the sensitivity around it. In certain states, they are
considering proposals that might involve moratoriums on data centers. That's
not the case in taxas. If you look at what
Governor Abbott and the legislature have been doing, they're pushing
a more data centers, more tax incentives, more infrastructure. I
(22:48):
think Virginia and several other places realize how important it
is to their economies as well and to their tax
base because data centers produce a lot of tax revenue
for these states, which go to help fund.
Speaker 4 (22:59):
Schools in the laws.
Speaker 3 (23:00):
Is anyone talking about public private partnerships in the data
center context. I feel like this is something that comes
in waves. People start getting really really excited about, like
public private partnerships for infrastructure build out, and then you
don't hear about it for like five years, and then
it comes back. Are we in one of those waves
right now when it comes to data center spend or not?
Speaker 5 (23:20):
Really? Yes, So I'm thinking about what I can say.
So the short answer is yes, those are being explored.
They're both from the perspective of public private partnerships, but
also from the perspective of like the Department of Energy
Loan Program Office and right you worked on TARA are
the others. Yes, they can provide financing support and the
Department of Energy has been very vocal about what the
(23:43):
Loan Program Office offers. The Department of Defense, Department of War,
I guess now also has programs that they can make available.
Some of these are actual grants, some of them are loans,
but separated apart from that, there's loan guarantees and so
you have a backstop by the federal government of a
loan that Let's be honest, if you're at forty percent
(24:06):
loan to value and you've got investment grade tenant that's
going to be paying the lease longer than the term
of the bond, do you really need it? Probably not,
but it can help lower the cost of capital anyway.
Speaker 2 (24:18):
Actually say more about that because we did several episodes.
We've done several episodes about the idea of loan guarantees
or particularly the Loan Program's Office. Well, but from the
private side, like talk to us about how that functionally
turns into Okay, we're going to get a better credit rating,
or this is going to crowd in private capital. As
they like to say, what happens, what is the steps
(24:38):
via which the government's role suddenly unlocks this finance.
Speaker 5 (24:42):
I think in all credit, when you're trying to underwrite
any kind of loan, you want to see what are
the cash flows or what's the collateral? And am I
going to get paid back? What's the likeliod right? And
one of the things that the frameworks I think are
show me who you walk with, and I'll show you
who you are.
Speaker 4 (24:59):
Right.
Speaker 5 (25:00):
Fine, if you have the United States government that is
providing a backstop, then I can be.
Speaker 4 (25:05):
Confident I'm going to get paid back.
Speaker 5 (25:07):
If it's Microsoft or Google or another who's providing a
guarantee on a project or the loan, then I'm very
comfortable that I'm going to get paid back. When you
put these types of things together, that means I don't
have to charge you an extra incremental amount to protect
me from that credit risk, and that extra money that
(25:29):
you keep in your pocket you can then turn into
additional projects and it's a velocity of money concept.
Speaker 3 (25:37):
I want to go back to private credit for a second, because,
as you mentioned earlier, a lot of these deals have
been done in the private credit space so far, and
companies have a lot of options when it comes to financing.
As I mentioned in the intro, they can go the
public route, they can securitize, they can go to private credit.
And whenever people talk about private credit in the context
of AI, they always say vague things like, oh, provides
(26:00):
customizable financing options and stuff like that. What exactly is
the attraction of private credit for data centers and AI
build out.
Speaker 5 (26:10):
So one of the most attractive things that private credit
can but doesn't always offer, is nondluted capital. Right, equity
is diluted, and equity is very expensive. There's that risk premium.
Speaker 4 (26:22):
That's associated with it.
Speaker 5 (26:23):
Private credit, there is an assumption in the story that
because of the extra protections that they receive, they don't
need the same equity risk premium. So a lot of
them are looking at maybe a fifteen percent IRR. They
might charge you ten to twelve percent up front, but
then because of the moint that basically their minimum return
(26:45):
on the capital that they'll get paid or an IRR
premium over time in the takeout, then they'll have a
catch up on the back end the equity they're taking
a percentage of what you at the end of the
day are going to get, and it's usually a much
more expensive piece private credit.
Speaker 2 (27:01):
But what about private credit versus other forms of credit
like bank lending or the public bond market.
Speaker 4 (27:06):
Well, can you get it?
Speaker 2 (27:07):
Well, I mean that's I mean, what is that's a
I don't know.
Speaker 5 (27:10):
The underwriting standards for private credit can be riskier than
what you would have from you know, a bull bracket
bank's credit desk.
Speaker 3 (27:34):
So when it comes to tenant diversification in data centers,
how is that judged and evaluated and priced? Because if
I think about who's you know, using a data center,
correlation is hard to measure at the best of times.
And if I think about, you know, like a new
business that's growing and everyone is suddenly using it, it
feels like the kind of thing that could end up
(27:56):
being very correlated as opposed to diversified.
Speaker 5 (27:59):
So when you are thinking about larger investment grade bonds
and debt in data centers, normally you are thinking about
wholesale data centers where there's one tenant that has that facility,
and that tenant has investment grade credit qual it's much
(28:20):
less likely that you are going to have a pool
of non investment grade tenants in a kind of co
location style data center, and then because of that, Fitch
or S and P or Kroll is going to give
you this investment grade rating. So I don't think that
the expectation should be that you're going to get a
(28:42):
investment grade rating on a pool of non investment grade tenants,
at least not right now. I think that eventually, when
you've got thousands of tenants across hundreds of data centers,
that becomes much more attractive.
Speaker 4 (28:54):
It's just not really where the market is right now.
Speaker 2 (28:57):
We did an episode a few months ago in September
actually where we're talking to this guy, Don Wilson in
Chicago who setting up a futures trading firm for GPUs
and theoretically it can hedge your GPU costs. As you
think about the industry going forward, could you see that
being a useful instrument for data center financing. Where I'm
a little concerned about is the value of this collateral goodness, name,
(29:20):
I want to hedge the GPU exposure. Could you see
over time maturing and debt being a valuable thing.
Speaker 5 (29:26):
I love new finance tools. I think that that kind
of creativity is really important. There's always an opportunity there
that The thing I have noticed with the data centers,
just with other asset classes, is that there's always a
cash flow stream that is not being utilized. And so
for example, if you have a securitization you're or really
(29:49):
any bond, you're not necessarily going to get credit for
everything in it. So your contracted cash flows, if that
counter party is an investment grade, may not get an
advance rate a loan to value on that. Somebody else
should be there in order to take advantage of that
and provide you with additional capital that you can then
(30:10):
reinvest into development.
Speaker 3 (30:12):
So last week we had a big outage at the
CME and futures were basically frozen for like ten hours
or something, and this was because of an issue at
one of the CME's data centers, which is operated by
a company called cyrus One. Is there a reputational or
operational risk that either deal structures or investors need to
(30:32):
be aware of when it comes to these financing arrangements.
Speaker 5 (30:35):
Reputational or in what regards so well.
Speaker 3 (30:38):
For instance, if cyrus one has a big melt down
at one of their data centers which seems to have
happened because one of their cooling centers reportedly malfunctioned. Is
that something that then gets priced into the financing arrangement
or is that something that investors should be concerned about.
Speaker 5 (30:56):
So these are definitely things that investors underwright too. So
if you are a blue chip operator and developer, you
are going to have a lower cost of capital than
you would otherwise. There are a lot of Johnny cum
Lateli's into data centers over the last two years, since
AI has really come to the forefront. The people that
(31:19):
have been doing it for a decade, they know what
they're doing and they're very good at it. And that
doesn't mean that there aren't going to be problems. Things
blow up sometimes.
Speaker 3 (31:28):
Squirrels, two wires, yeah, hopefully not subsea ones.
Speaker 5 (31:33):
There are accidents all the time, but that's part of
why you have these pretty incredible engineering studies that are
done in order to actually put these things together, and
freak accidents happen, and you know, that's part of the
credit risk.
Speaker 2 (31:49):
We just compared to other sort of real estate plays,
is there more sort of I guess, operational risk in
a data center than in other times? You know, we're
just some sort of retail distribution facility. I imagine the
sort of operational risk isn't going to be as great
and something like that.
Speaker 5 (32:07):
Yeah, so that's part of why they have these service
level agreements within the data centers themselves, where the operator
is agreeing to provide an uninterruptible, non intermittent power. That's
one of the big things that people focus on. And
how do the terms of that contract work and what
are the backstops. You could have a reserve account associated
(32:30):
with it so that if there are payments that are
necessary to be made, that there's just cash sitting there
ready to go. Normally, people are thinking that that would
reduce the cash flow on the bond, and that would
reduce at the end of the day, the equity distribution coming.
Speaker 4 (32:45):
From the SPV as opposed to affecting the payment on
the bond.
Speaker 3 (32:50):
That reminds me, actually, are you seeing a big surge
and demand for data center insurance or for people you
know who want to ensure not just against operational risks,
but cyber risk and things like that.
Speaker 4 (33:02):
Yes.
Speaker 5 (33:03):
So one of the wonderful things about any kind of
economic activity is that the insurance market is always there.
Speaker 4 (33:08):
To support it.
Speaker 3 (33:10):
Like the lawyers as well.
Speaker 5 (33:11):
Right, yeah, definitely give us a call.
Speaker 4 (33:13):
Right.
Speaker 5 (33:14):
The reality though, is there are products that data centers
have had for decades, and then there are new risks
that are coming up just because of how AI training works.
You can always go to Lloyd's of London in order
to get a specific policy if necessary, But for the
most part, these are risks that have already been priced in,
and there are products that are already there. Now there's
(33:34):
talk of well, there are products that exist in terms
of getting an insurance product to handle your technology risk.
So does the product work at the end of the
day or does it become obsolete too quickly? That looks
more like a bet, almost as opposed to a real
insurance policy.
Speaker 4 (33:53):
But it's something that can be underwritten.
Speaker 2 (33:55):
How valuable it is just having a plug into the grid,
you know, I'm thinking about are those various deals of
companies wanting to buy bitcoin mining operations, for example, and
it seems like you know what, yeah, maybe you can
make a little money mining bitcoin, but you have you
have access to twenty four to seven reliable power. That's
a lot more valuable than what's going on inside the
(34:17):
shell here. Talk to us just about that value of
anyone who has access to power.
Speaker 5 (34:21):
So powered land is huge and that is developing. You know,
it's existed for a while, but is becoming more and
more important because there are rets and real estate developers
who don't need to have the sophistication of can I
do the new direct to cooling technology for a powered
(34:41):
shell or turnkey solution. I'm just going to have land
and I'm going to make sure that there's sufficient power
here for you to build your data center or for
you to bring your GPUs into. That's attractive if you
listen to the earnings calls of several of the real
estate developers, they're moving into that if they have an already.
Speaker 2 (35:00):
So their job is they're just going to secure land
that they can that they know they can get power too.
Speaker 5 (35:05):
So they've already got like they've got that right. So
the interesting part is there's so many different projects over
the last several decades where they've been working through interconnection
studies for the land for you name it project, and
they're waiting years and years just like everybody else, in
order to get those done. Well, why use it for
this when we can use it.
Speaker 4 (35:26):
For that and data centers?
Speaker 5 (35:28):
You can make a lot more money on it.
Speaker 3 (35:30):
Isn't the obvious solution to the power problem just for
the big guys to build their own power system and
maybe spend a little bit more money plugging it into
the grid. Again, if political pushback is becoming an issue,
or if regulators are worried about this, shouldn't they just
do it on their own? Is that the straightforward thing
to do.
Speaker 5 (35:49):
The hyperscalers themselves. I think that goes back to what's
the best use of their capital. They're not in the
infrastructure business specifically, though, I will say if you look
at Love, Amazon is an example. They sold books, they
had the website, they needed to expand, so they build
Amazon Web services. They need a distribution.
Speaker 4 (36:09):
They've got that.
Speaker 5 (36:10):
Tech companies have been becoming energy companies for years. Energy companies,
we know, had to become tech companies a decade ago
in order to just keep up. But now there's this
integration that's happening from both sides, both in terms of
what's happening in our operations but the ownership itself.
Speaker 2 (36:29):
Just going back to powered land for a second, So
what you're saying is that there are these developments that
have been going on a long time, but they initially
planned for something else, But that today in twenty twenty five,
is they're getting closer to when they could be connected.
Maybe AI is you know, this connection is a lot
more valuable for an AI data center.
Speaker 4 (36:49):
Absolutely, so this is interesting.
Speaker 2 (36:50):
See this to me, like, the only reason I go
back to this is because one of the things that
when people talk about an AI bubble, if there is one,
is this idea of crowding out other productive use of
the economy. Right, are there better things in the long
term that we could have done with these turbines? Are
there better things that we could have done with these
electrical connection systems, et cetera. And other companies might have
(37:11):
been waiting on some piece of gear and the AI
data center outbid them, And I'm going to I'm not
asking you like this sustainable, but there are other things
that are going to lose out or not have access
to electricity that people wanted to do but aren't going
to because that wire is more valuable for an AI.
Speaker 4 (37:28):
Company one hundred percent.
Speaker 5 (37:29):
Think about the actual interconnection queue two and a half
years ago, before AI became a big deal, there was
I want to say, twenty six hundred gigawatts in the
interconnection queue, and we were expecting eighty percent of that
would never actually be constructed. Only twenty percent of it would.
And that's pretty typical even on a going forward basis,
(37:53):
what are you going to do with those projects and
that land that has already started in a process of
interconnections that he is and the like, Well, you can
shift that to data centers, especially because a lot of
that you were producing solar batteries, wind and other power
gen Now you add on the data center layer to it.
(38:13):
And what may not have been economic before now is.
Speaker 3 (38:17):
Should I build a data center?
Speaker 2 (38:18):
Joe, Yeah, I've.
Speaker 3 (38:19):
Got a grid connection, I've got a water Yeah, there
we go. Okay, next project all lots builds a data
center in protected land in Connecticut?
Speaker 6 (38:29):
Probably not actually, So this sort of piggybacks on a
question that Tracy as already. But why not just for
you know, these is companies, particularly the hyperscalers that look
out in the environment and there's all these people showing
up at meetings complaining about the water et cetera like that,
Why isn't the future just entirely behind the meter in
(38:52):
Texas where it's like we're just gonna.
Speaker 1 (38:53):
Build it all.
Speaker 2 (38:54):
We're gonna have the natural gas plant on site. We're
never gonna bother with the grid. We're never gonna We're
just gonna have the plan right there. Why isn't that
just the entire future of data center?
Speaker 5 (39:03):
One of the issues with behind the meter is what
if the data center goes away? So, for example, what
if Mark Zuckerberg one day decides I'm not doing the
metaverse anymore and somebody in AI says I'm not doing AI,
or we move from GPUs to quantum.
Speaker 4 (39:22):
Computing or something like that.
Speaker 5 (39:24):
You want to have that generative capacity interconnected with the
grid so that you don't have a stranded asset.
Speaker 3 (39:30):
Okay, oh yeah, stranded assets. There's a word I haven't
heard of you.
Speaker 1 (39:34):
Yeah, I know.
Speaker 2 (39:35):
So just looking forward and I mentioned earlier core Weave
saying okay, there is a delay and some of it's
build out. What are the big choke points and do
you expect them to stack up? We recently did an
episode with a Travis Cavula Energy and he was like,
I don't know, like the amount of just the sheer
amount that we're adding to the grid, Like it's gonna
(39:56):
be tough and I don't know how it's all going
to pan out for some of these projects, but what
do you see as the sort of big bottle extra
choke points that you're thinking about in the coming years.
Speaker 5 (40:04):
So power continues to be the number one bottle, like
I don't think anybody would dispute that. Water obviously is
an issue as well. Getting the turbines and getting what
you actually need in order to produce power is very difficult.
I do think though, that when you look at how
some of these interconnection requests are prepared, you have five
(40:27):
or ten different people making applications for the exact same project,
So it inflates what the expectations are on the number
of projects in the market at a given time. When
you get rid of all of that extra wash, you
wind up with hyperscalers, large enterprises, and other real investment
(40:49):
grade or serious tenets. Give you projects that can get done.
That's infrastructure, that's infrastructure grade, and a lot of the
speculative assets those are power points. They probably are not
going to get made, particularly if there's any kind of
economic shock later.
Speaker 2 (41:05):
Travis Watford, thank you so much for coming on OUTLAS.
It was great.
Speaker 3 (41:08):
Thank you, Thank you so much.
Speaker 2 (41:10):
Appreciate it, Tracy. I thought that was really helpful, really
clarified a lot of things for me. I'm trying to think,
Like the point about the sequencing of the financing, I
(41:32):
thought was really interesting or very important to help me
understand these things, because in my mind, I'm like, well,
they're going to lose so much money. They're breaking ground
on all these deals. What if they don't actually get
implemented because you're waiting forever? And so you're hearing him
describe the sequencing of different financing at different stages, like,
all right, well, at least that makes sense to me.
Speaker 3 (41:50):
Yes, I still feel like there's kind of a mismatch issue.
Speaker 2 (41:54):
Sure, well, it.
Speaker 3 (41:55):
Just feels like, you know, you're talking about a a
technology that has like its own upgrade risk. Let's say,
like you know, people are developing new chips pretty fast,
and you don't know when the next one is coming
down the line and when you might want to replace
all your chips with something else. So that's one thing
tendency rollover risk. I know he pushed back a little
(42:16):
bit on the diversified point, but again, my understanding is
for a lot of the ABS structures, maybe CMBs as well,
diversification is part of the proposal, and I think he
mentioned it earlier, and that seems difficult to me to
accurately measure. If you have a bunch of tenants all
you know, doing something in the cloud, drawing something from
(42:36):
a data center, if there's a big macroeconomic downturn or
something like, who's to say that they're not all going
to renig on their lease at once.
Speaker 2 (42:44):
The levels of uncertainty yah, seems so extreme because you're
talking about, Okay, there's the economic downturn. There's the fact
that maybe a lot of this AI stuff could completely
fizzle out and doesn't produce even in normal times. Then
there's the technological questions. Then there's the operational questions about
are you actually good at operating and building a data center?
(43:06):
Not everyone who's gonna be the same, And then there's
the grid interconnection and all of these things about like
reliability of power, et cetera. So it feels like, yes,
on the one hand, I'd very much buy that on paper. Yes,
you know, this is the twenty twenty five iteration of
what used to be cell towers or what used to
be rooftop solar or anything else. But with just an.
(43:29):
I mean he mentioned with the cell tower for example,
if one guy whose job is to mow the lawn, right,
that's like that's the sort the like operational component. I
get the you know, most of the time the tower
is just there, right, and you have to make sure
that it's in it's safe area, et cetera. But the
(43:49):
degree of complexity, of operational complexity, of technological energy complexity
for these it just seems like exponentially higher.
Speaker 3 (43:55):
Yeah, And I keep thinking back to just the sheer
scale of it, and like thebers that got thrown around
literally trillions of dollars. In the next few years. Well,
I'm sure we'll do more episodes on it.
Speaker 2 (44:06):
There are so many sub episodes we could do, including
how the best of the Texas is ninety eight water
districts and how you find.
Speaker 3 (44:14):
We No, no, no, Joe, you know what sub episode we
could do?
Speaker 2 (44:17):
Subse cables we got to do. We didn't get into that,
but we should do an an Yeah, well we should
do more subs cable episode. And actually just in terms
of data center siting, like access to you know, latency
risk and where it needs to be, et cetera. It's
something we should talk about more.
Speaker 3 (44:35):
Shall we leave it there?
Speaker 4 (44:36):
For leave it there?
Speaker 3 (44:37):
This has been another episode of the Odd Thoughts podcast.
I'm Tracy Alloway. You can follow me at Tracy Alloway and.
Speaker 2 (44:42):
I'm joll Wisenthal. You can follow me at the Stalwart.
Follow our producers Kerman Rodriguez at Carman Arman Dashel Bennett
at Dashbot and kill Brooks at kill Brooks. For more
odd Laws content, go to Bloomberg dot com slash odd
Lots with the daily newsletter and all of our episodes
and you can shed about all these topics twenty four
to seven in our just discord dot gg slash online.
Speaker 3 (45:03):
And if you enjoyed this conversation, if you want us
to do a sub episode on subc cables, then please
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And remember, if you are a Bloomberg subscriber, you can
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