Europe primed for data centre ABS financing as investment soars

Global investment in data centres reached $36bn last year with $22bn invested in the first five months of this year alone, according to analysis by global law firm Linklaters, signalling robust growth in support of the digital economy.

North America leads with significant investment, accounting for 62% of the global total in 2023 and 69% of investments up to April 2024, equating to $15bn invested. Europe's market share has jumped from 6% in 2022 to 20% in 2023, with over $7bn invested in European data centres so far in 2024, giving Europe a 29% market share and highlighting the continent's growing importance in the data centre market.

While North America continues to hold a significant portion of activity, Europe stands out as the only region to build a year-over-year increase in transaction volume in 2023.

The Rise of Asset-Backed Securitisation

The financing strategy for data centres is evolving. As these centres reach income stabilisation, the transition to ABS offers a more cost-effective means to refinance existing bank debt, showcasing the versatility and appeal of the product in this sector.

The ABS market in the US experienced a resurgence in 2023 with $5.4bn in securities backed by data centre revenues issued, and the first five months of 2024 has already seen issuances totalling $3.7bn. This is a significant rebound following a contraction in 2022 due to elevated funding costs.

Since 2018, data centres across North America have seen issuance of over $21bn in asset-backed securities. This growth trajectory emphasises the sector's appetite for sustained development and the integral role that ABS financing will play at the appropriate phase in the lifecycle of these assets.

As data centre deals mature, expectations are set for a rise in activity in the European ABS sector. Europe’s data centre sector has just seen its first ABS issuance at £600m, with the growth in data centre transactions set to make the sector prime for further ABS uptake as owners look to optimise their financing and unlock capital, indicating the early stages of an emerging market with vast potential.

A key difference of the European sector compared to North America is the significant difference between legal jurisdictions across the continent. Pan-European ABS platforms have been successfully executed in other established sectors – this could be replicated for data centres.

Elisabeth Johnson, Structured Finance Partner at Linklaters (London) commented: "Data centres have been the target of significant global investment, with appetite growing substantially within Europe. We're at the edge of witnessing asset-backed securitisations in Europe pick up pace as these ventures mature. This is an exciting time for the industry, where strategic financing structures will pave the way for the next wave of digital infrastructure expansion. Linklaters has successfully structured a large number of complex pan-European ABS structures and is expertly placed with its network of offices in all major European jurisdictions to advise on novel structures."

Patrice Doat, Structured Finance Partner at Linklaters (Paris), added: "Data centres have become an attractive asset class with predictable cash flows, making them ideal candidates for ABS. France, with its strategic location and strong regulatory framework, offers an attractive environment for such innovative financing structures. With this in mind, it will be essential for firms to navigate the specific legal and regulatory considerations, including compliance with the EU securitisation regulations and French commercial real estate laws, to fully leverage ABS in this sector."

Barbara Lauer, Capital Markets Partner at Linklaters (Frankfurt), observed: “Data centres have seen exponential growth, driven by technological advancements and market trends such as the popularity of AI and the need for cloud-based storage. As the sector matures, ABS has potential to become an additional funding source noting that it will be crucial to apply the knowledge and experience gained on other more esoteric asset classes in structuring such deals in an insolvency remote manner. ABS may be used to enhance liquidity and potentially to lower capital costs.”

Linklaters is at the cutting-edge of the digital infrastructure sector and the remit of the team has widened as the market has grown to incorporate a growing number of digital infrastructure assets, including data centres, fibre, towers and satellites.

These transactions often involve multiple complexities of bespoke corporate and financing structures, an increasingly regulated investment sector, and complex development and offtake contracts driving value, playing into the combined strengths of the firm’s market leading corporate, finance, telecoms and regulatory teams.