AI Power Demands Spur Builders to Seek Billions in Bank Pledges

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Giving fresh impetus to the instruments, President Donald Trump’s administration is pressuring data center operators to fund the power generation and infrastructure such projects need. Regulators are directing regional grid operators to swiftly create processes to protect consumers from higher energy bills to cover the costs.

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“Without a letter of credit, most utilities won’t even study your project,” said Carson Kearl, a senior analyst at energy research firm Enverus. “Vast amounts of capital are required upfront to participate in this market.”

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Letters of credit have long underpinned much international trade, with commodities giants and oil frackers relying on them to guarantee cargo shipments and equipment costs.

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While data centers have also tapped the arrangements as power needs soared, the scale of the bank syndication is new: Switch, for example, ultimately gathered 15 lenders to back its letter-of-credit facility after increasing the deal in a matter of weeks, according to one of the people.

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Instead of posting cash to utilities, Switch provides the letter of credit as security. This arrangement — which it said was the first of its kind — costs the company a roughly 2% rate. Switch, which is majority-owned by DigitalBridge Group Inc., is weighing plans for a public listing. 

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Representatives for TeraWulf, Blackstone and Switch declined to comment. Representatives for QTS didn’t respond to a request for comment. 

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Speculative Plans

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As data center grid connection applications overwhelm local power networks, utilities like Virginia’s Dominion Energy Inc. are working to purge speculative proposals. According to Enverus, data centers and other large industrial facilities are waiting in line for more than 800 gigawatts of power, comfortably surpassing the entire nation’s average electricity demand. Many of the projects are speculative and unlikely to materialize. 

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Developers with Wall Street guarantees stand out from speculative builders, helping utilities identify serious players just as public anger over soaring utility bills, proliferating transmission lines, and rolling blackouts have made data centers a flashpoint.

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“Utilities are getting smarter,” said Michael Lardieri, a managing director at BBVA, which co-led the Switch deal with Natixis. “They’re realizing not every person who asks for power is going to be able to take it because they may not be around.”

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For private equity backed developers, whose closely-held financials make it difficult for utilities to assess their creditworthiness, letters of credit are crucial. For them, the guarantees function like an alternative credit rating, where banks effectively substitute their creditworthiness for that of the developer.

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Bankers say that because letter-of-credit facilities are typically tied to several properties and utilities, the prospects of power providers drawing the entire multibillion-dollar amount — or of many projects failing at once — are unlikely. Still, banks at times agree to letters of credit before the developer has signed a lease with a tenant or even before the project financing is put in place, raising potential risks.  

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That’s prompting caution on Wall Street, too: Morgan Stanley, for one, has signaled to developers that it holds a high bar for leading any letter-of-credit deals, according to another person.

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A representative for Morgan Stanley declined to comment. 

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Either way, the deals could become lucrative. The strategy positions banks to win ancillary business from developers down the road, such as mergers and acquisition advice or other services to fuel more AI spending.

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Smaller players are also turning to the arrangements: Yondr Group, backed by DigitalBridge and La Caisse, recently secured such a facility. Some developers, unable to get bank support, are even sounding out private credit lenders to guarantee payments, according to another person familiar with the matter.

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“Power availability is the single biggest limiting factor on the pace of the data center buildout,” said Mario Iacobacci, head of construction and infrastructure advisory for North America at Oxford Economics. 

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