The market for data center bonds has expanded from nothing in ten months, with US developers and operators raising approximately $120 billion since last October through structures that bear little resemblance to traditional corporate debt.
The bonds are typically issued via ring-fenced special-purpose vehicles, secured against property, buildings and lease agreements, and rated using a mix of project-finance and real-estate methodologies. The smallest issuance in the universe sits at $715 million; many bonds range from $2 billion to $5 billion. The largest is the so-called Beignet deal — a Meta-backed project in Louisiana — at $27 billion.
Anke Richter, credit strategist at ISP Group, published one of the first comprehensive market reviews in August: a 22-page report containing quantitative analysis and her own valuation framework for the new bond class. Two subsequent issuances provided an early test of her method.
Richter draws parallels to two earlier phases of market education. The first mirrors the internet boom of roughly 25 years ago, when she notes a similar "everybody is a winner" attitude and premature valuation of metrics such as web traffic. The second resembles the initial uncertainty around AT1 and hybrid bonds, when investors questioned basic structure and risk characteristics.
"The market is not priced to perfection," Richter said. "That is precisely why I see pockets of opportunity."
Underpinning the asset class is a project-finance logic. Large sums are raised, construction takes one to 1.5 years, and cash flow follows once operational. Because the structures are ring-fenced, Richter noted that, all else equal, issuers can carry higher debt capacity — though some contain weaker covenants that permit re-leveraging. Rating agencies apply divergent approaches: some projects are assessed under project-finance methodology, others under classical real-estate corporate finance frameworks.
"When we talk about data centers, we are essentially talking about very sophisticated warehouses," Richter said. "We are not talking about the technology — the tenant brings that in. This is brick and mortar, a building."
The construction phase remains the riskiest period. Electrician wages in the US have risen to as much as $300,000 annually, and energy supply constraints add further complexity. Richter, who previously followed the oil and gas sector intensively, compared data-center construction to North Sea oil drilling or large chemical complexes: technically less challenging, but demanding rigorous project management on timing and execution.
Once built, risk shifts. Tenants include companies such as Amazon and Meta under leases of 10 to 20 years, with annual escalations built into contracts and cancellation effectively barred — exit requires payment of the remaining lease term. Most projects can amortize within the first lease period, eliminating the refinancing risk common in conventional real estate.
"Your big risk is whether the tenant remains solvent," Richter said.
Yields on these bonds run materially above comparable-rated corporate debt. Richter argued the spread should compress further once construction risk is behind the issuer. "In my view, something like this cannot be 100 to 150 basis points away from the tenant," she said. "I would suggest 40 to 50 basis points. That is where the compression potential lies."
Her framework found early validation in two deals. For Zenith Arc, an Oklahoma project, primary price talk sat at the high end of 8%; Richter's model indicated a fair value of at least 9.30% to 9.40%. The bond was ultimately placed at 9% and later traded at 9.60% to 9.70%. For QTS, she had called 6.20% to 6.30% fair value; the bond issued above 7% and currently trades around 6.90%, despite higher rates.
Richter cautioned that bonds backed by lower-rated tenants offer less scope for spread compression. Oracle, rated low triple-B, was cited as an example where both tenant and project sit at similar levels, limiting upside. Projects where CoreWeave is the tenant yield more, but the interview was truncated before further detail was provided.
