SEC Exempts Data-Center Bonds From Key Securitization Rules

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(Bloomberg) — The Securities and Exchange Commission has made it easier for data center owners to sell asset-backed securities, potentially opening the door for more debt sales as tech firms scour Wall Street for ways to pay for artificial intelligence. 

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The SEC said a major subset of data-center securitizations don’t need to have disclosures and investor protections that similar deals require. That includes risk retention, a requirement that companies issuing asset-backed securities retain some of the debt to better align their interests with investors.  

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In a letter late last month, staff wrote that data centers aren’t financial assets that liquidate over time, like loans or leases, and therefore bonds tied to them aren’t subject to the same rules as debt backed by car loans or home mortgages. The letter was written in response to a query from Latham & Watkins, a law firm that advocated for clarification of the rules.

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The requirements that the SEC’s staff said don’t apply were generally created after the 2008 global financial crisis to protect investors from excesses in securitization markets that ultimately brought about the near collapse of the banking system. 

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Those rules don’t make sense for all types of deals and compliance with them has proven costly and unnecessary, even keeping some firms from entering the market, according to lawyers at Latham. For example, data center operators that issue ABS already retain a substantial amount of risk in the deals, and if they didn’t they wouldn’t be able to achieve strong credit ratings, according to Kevin Fingeret, a partner at Latham. 

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“There was a growing need for this relief,” said Fingeret. Complying with the rules required sponsors to take on “ownership structures that weren’t necessarily in line with their ultimate objectives.”

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While the SEC’s guidance isn’t a formal rule change, it will still have practical consequences as firms have been applying the rules as a precaution.

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The change comes as Wall Street strains to accommodate a flood of debt to pay for a historic buildout of data centers and digital infrastructure. Asset-backed securities represent just one pocket of the AI-linked debt universe, but they’ve already expanded to $15.5 billion of annual new issuance last year from $2.4 billion in 2020, according to data compiled by Bloomberg News. They’re on pace for a new record this year, the data show. 

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The Trump administration has been a vocal booster of America’s data-center buildout. Last year the president signed executive orders aimed at accelerating AI development in the US by loosening regulations and bolstering data-center energy supplies.

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The SEC’s clarification doesn’t exempt other types of data-center securitizations from the rules. For instance, commercial mortgage backed securities backed by data centers still must comply because their collateral is a mortgage, rather than the physical assets themselves. 

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—With assistance from Charles Williams.

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