Data centre financing: A European perspective

Cloud vs AI-focused data centres

Until recently, we have mostly seen financings of “cloud data centres”, where projects are developed by specialised firms to lease capacity to cloud providers. In this model, the developer typically focuses on constructing the shell (land, building envelope and essential facilities such as cooling, power, connectivity and security) while the cloud provider installs its own core (servers, chips and racks). Cloud data centres are usually highly bankable as these projects are pre-let to investment-grade customers under long-term contracts (typically 10–15 years).

The current AI boom is driving the emergence of AI-focused data centres, which differ significantly from cloud facilities. Key distinctions include: (i) developers are often responsible for providing both the shell and the core infrastructure as customers lease compute power rather than physical space, (ii) capital requirements are significantly higher since the core can cost roughly four times more than the shell, (iii) customers are often new market entrants with a credit profile and track record which differs substantially from the traditional hyperscalers and (iv) customer contracts tend to be shorter.

This creates substantial complexities for developers and prospective financiers in structuring viable financing solutions for these next-generation data centres.

Key drivers

The most suitable financing structure is determined by several key drivers, which include:

• Developer track record: The stage of the developer in its lifecycle plays a key role in shaping financing options. Developers in the early phases of their journey - particularly those undertaking their first data centre projects - face greater scrutiny from lenders due to limited experience and unproven execution capabilities (and a less settled corporate relationship with their offtakers). In contrast, developers with a strong track record, a demonstrated ability to attract and maintain hyperscale or other creditworthy tenants and a platform of stabilised, revenue-generating assets are generally viewed as more bankable. A developer with a mature and stabilised portfolio may be well-positioned to access portfolio-level financing or pursue a securitisation structure, as further described below. These options allow for more efficient capital deployment and can unlock long-term funding by leveraging the scale, diversification, and cash flow stability of the broader platform.

• Contracted vs. uncontracted asset: Assets with signed customer contracts (in particular long-term contracts) typically support infrastructure-style financing (and are increasingly attractive to institutional securitisation investors), while uncontracted assets may be better suited to real estate finance structures, due to their higher risk and limited revenue visibility.

• Development asset vs. stabilised asset: Not all financiers are willing or able to take construction risk and may therefore only provide funding once an asset begins generating revenue (or has a revenue stream unconditionally contracted to start as at a specified date). To address this, some developers establish separate corporate vehicles - typically a 'Devco' for development-phase assets and a 'Yieldco' for revenue-generating, stabilised assets. This structural separation allows developers to attract different pools of lenders and investors, each aligned with distinct risk-return profiles.

• Short-term vs. long-term contracts & customer type: Long-term contracts, especially with hyperscalers or other investment-grade customers, provide revenue certainty and support more robust financing structures; short-term or less creditworthy customers may require more conservative terms. The recent surge in AI adoption has brought a wave of new entrants (neocloud) into the data centre market, many of whom lack an established track record. For lenders, this presents a challenge: assessing the creditworthiness of these emerging customers or their tenancies is more difficult, especially when their contracts are short-term (often not more than 5 years).

• Single asset vs. multiple assets: Financing a single data centre (or a single data centre campus) is typically more straightforward, while portfolio financing offers the advantage of risk diversification but is more variable on terms depending on the strength and depth of the portfolio including weighting of operational and development assets. Portfolios also introduce a level of complexity, for example around cross-default provisions (and isolation of defaulting projects), covenant testing, and risk allocation across projects. Larger portfolios with a mix of development and stabilised assets may benefit from portfolio finance structures, allowing flexibility while leveraging the stability of mature assets. Securitisation (ABS) becomes a viable option when a developer holds a sizeable, mature portfolio - ideally with strong concentrations in a single jurisdiction, allowing for sufficient deal sizes without introducing cross-border complexities.

• Equipment: Data centre financing typically focuses on the shell - land, building envelope and essential facilities such as cooling - excluding the core (servers, chips, racks). Hyperscale customers often bring their own core, while AI data centres (offering models like GPU-as-a-Service) increasingly require developers to finance both shell and core, significantly raising capital needs and technology risk for the operators.

• Equity strategy: The choice of equity strategy plays a pivotal role in shaping a developer’s corporate structure. One common approach is the Devco/Yieldco model, where separate entities are established for development-phase assets and stabilised, income-generating assets. This segmentation enables the developer to attract investors with distinct risk-return profiles aligned to each vehicle. Alternatively, some developers opt for a single corporate entity that holds a mix of development and stabilised assets, allowing equity investors to participate at the Holdco level and benefit from portfolio diversification. Another strategy involves bringing investors in at the OpCo level, where individual data centres are jointly owned by the developer and one or more partners. Each structure influences the financing approach: for instance, OpCo-level investments often lend themselves to project-specific financing, while a Holdco structure may be better suited to portfolio or even corporate-finance style debt facilities. The type of lender also varies depending on the chosen structure. For example, a Yieldco financing is often attractive to institutional investors with less construction-risk appetite.

• Flexibility: Sponsors often require flexible terms such as early repayment options, multiple drawdowns, accordion features and extended availability periods, especially in phased developments or multi-site rollouts. While commercial banks are generally well-positioned to offer this level of flexibility, it can be more challenging for institutional lenders, whose investment mandates and stakeholder obligations may limit their ability to accommodate such features.

• Location: Jurisdictional factors including permitting regimes, power availability, country risk and legal frameworks can influence lender appetite and determine which financing structure is most appropriate. As an example, due to varying legal regimes, the securitisation of a pan-European data centre portfolio is seen as very challenging.

Financing structures

Real estate finance

Some lenders have traditionally viewed data centres through a real estate finance lens, with significant focus on the value of the land and physical property rather than operational performance (although ultimate structure, tenor and pricing being influenced by the degree of any pre-letting). This approach influences how risk is assessed and capital is priced, often resulting in different cost of capital expectations compared to infrastructure financiers.

This type of financing is especially suitable for acquiring land and funding early-stage development, where no customer contracts are in place (or indeed single asset development financings which are pre-let) and the asset’s value is largely tied to its physical footprint.

There is a classic “catch-22” in data centre development: on the one hand, the customer requires certainty that the developer can deliver the project - meaning certain permits must be secured and funding in place before a customer will commit (and remaining permitting risk will typically sit with the developer rather than the customer). On the other hand, financiers typically require a signed customer contract before committing capital, as it provides revenue certainty and reduces risk. This can place a burden on equity to bridge the support needed to ensure customers will commit, which then unlocks the door to debt financing, and consequently sees more mature customers such as hyperscalers preferring to contract with more established developers.

Blended financing structures

In certain cases, financing is structured to evolve over time through a blended financing model. For example, in a recent development-phase data centre project with no signed customer contract, a real estate finance approach was initially adopted. However, to ensure long-term flexibility, the financing was designed to transition to an infrastructure-style regime once a contract with an eligible customer was secured. This shift reflected the changing risk profile and bankability of the asset - triggering changes such as the fall-away of certain sponsor guarantees upon customer contract signing.

Project finance (single-asset and multiple-asset)

We have been involved in numerous project financings for both stand-alone greenfield data centre projects and portfolios of multiple developments. In the case of a single asset, financing is typically provided to a special purpose vehicle (SPV) on a limited recourse basis, meaning lenders rely primarily on the revenues generated by the project itself. These revenues are usually underpinned by one or more long-term offtake contracts, often with a hyperscaler, which provide the necessary bankability for lenders to commit capital although we have also seen financings of co-location data centres using this model (albeit currently less common in the market).

When financing a portfolio of greenfield data centres, the structure may resemble single asset financing but introduces additional complexity. For instance, lenders must consider whether a default in one project should trigger a drawstop or cross-default across the entire portfolio. This depends on the relative importance of the defaulting project within the overall structure. Typically, financial covenants are tested at the portfolio level, rather than on a per-project basis, allowing for greater flexibility and risk distribution across multiple assets.

For more information on project finance structures including some of their key features, see our article on this topic: Lender considerations on data centre financings in Europe

Borrowing base financing

We have more recently advised on borrowing base facilities in the European data centre market - an instrument commonly used in the U.S. but less prevalent in Europe. These facilities are typically structured as an umbrella financing solution for a pool of data centre projects, allowing assets to be added or removed over time. As the composition and maturity of the pool evolves, the overall debt capacity can adjust dynamically, reflecting changes in asset performance and risk. Additionally, the loan-to-cost ratio is dependent on the development stage of each project, ensuring that the financing remains aligned with the maturity and bankability of the underlying assets.

AI infrastructure financing (equipment financing)

Data centre financing typically focuses on the “shell” - the land, building structure, and essential infrastructure like cooling, power, connectivity, and security - excluding the “core” components such as servers, chips, and racks. In hyperscale data centres, it is common for customers to install and operate their own equipment. In contrast, AI-focused data centres often see developers owning both shell and core, offering compute capacity through models like GPU-as-a-Service, Compute-as-a-Service, or Infrastructure-as-a-Service. This approach significantly increases financing needs as the developer will not only need to make investments to build the shell but will also have to acquire and install the core. The value of the core is in most cases roughly four times higher than the value of the shell and therefore the AI infrastructure (or equipment) financing is usually very significant. Financing of equipment (the core) brings with it a different risk profile. In this fast-paced sector, hardware obsolescence is an evident risk. To match the lifecycle of the equipment and in view of the technology risk AI infrastructure financings tend to have a short term (typically max. five years) and will typically amortise, either fully or with a relatively small tail. The chips, servers and racks will be used as collateral as might be expected.

Devco / Yieldco structures

Larger platforms in the data centre space often adopt a bifurcated corporate structure that separates development-phase assets from stabilised, income-generating assets. This is typically achieved by establishing two distinct entities: a Development Company (DevCo) and a Yield Company (YieldCo or StableCo). The DevCo holds assets that are under construction or in early-stage development, while the YieldCo owns operational assets with established revenue streams. This structural separation is not merely administrative - it reflects fundamentally different risk profiles, capital needs, and investor appetites. DevCos are inherently riskier due to construction, permitting and market uncertainties, and therefore attract lenders and equity investors who are comfortable with higher risk in exchange for potentially higher returns. These may include specialist infrastructure funds or banks with a mandate to support greenfield projects. In contrast, YieldCos appeal to more conservative institutional investors such as pension funds and insurance companies, which prioritise stable, long-term cash flows and are often restricted from taking construction risk.

This dual-entity approach also enables more efficient capital allocation and tailored financing strategies. For example, DevCos may rely on mezzanine debt or construction loans with higher margins, while YieldCos can secure lower-cost, long-term debt backed by contracted revenues. Importantly, this structure helps platforms manage the transition of assets from development to operation: once a project reaches commercial operation and secures long-term offtake agreements, it can be transferred from the DevCo to the YieldCo, unlocking refinancing opportunities and recycling capital for new developments.

Portfolio financing

We have advised on various portfolio financings at holdco level used to refinance a large number of stand-alone project financings. This approach is particularly attractive for developers with a mature portfolio of data centres generating consistent cash flows. By consolidating financing at the holding company level, developers benefit from a single syndicate of lenders, streamlining management and eliminating the need to coordinate multiple lender groups across individual assets. At this level, lenders base their credit assessment on the aggregate cash flow of the portfolio, with only limited controls at the asset level, making the structure more akin to corporate financing than traditional project finance.

Although there are exceptions, we have typically seen portfolio financing structures on data centre financings across emerging markets, rather than single asset financings. This is often driven by scale and risk diversification and a need to aggregate a portfolio for financing in order to address those issues. However, such portfolio financings are typically structured on terms more closely resembling a project finance (albeit with multiple rather than single assets) without the more flexible terms offered by portfolio or borrowing base structures in the developed markets.

Bridge financing

Bridge financings are used to address timing mismatches in data centre finance transactions, particularly in the form of a "bridge to institutional take-out". This structure usually involves a commercial bank providing a short-term loan to refinance existing debt, with the expectation that the loan will be repaid once long-term institutional capital - typically from pension funds, insurance companies or infrastructure debt funds - is deployed. Although institutional investors may have committed to the transaction, procedural delays, regulatory approvals or internal decision-making timelines may prevent immediate execution. The bridge loan serves as a temporary solution enabling sponsors to meet urgent refinancing needs without waiting for institutional capital to be available. These facilities are usually structured with a clearly defined exit strategy and a short maturity period - often between a few months and a year. While the cost of capital is higher than traditional long-term debt, the speed and flexibility of bridge financing make it a valuable tool in time-sensitive situations.

Bespoke Private Placements

We have extensive experience advising on bespoke private placements in various sectors, where long-term funding is provided by a small group of institutional investors (lenders). These financings often feature tenors ranging from 20 to 35 years, aligning well with the long-term liabilities of institutional investors. However, a key challenge arises from the mismatch between the financing tenor and the duration of customer contracts as the latter are often significantly shorter. Hyperscale customer contracts typically span around 10 years, which would introduce a renewal risk for private placement lenders. This can limit institutional appetite for single-asset financings. As a result, we have seen institutional lenders participate primarily in larger portfolio financings, where the diversification across multiple assets and staggered contract tenors helps mitigate renewal risk and enhances overall credit strength. Certain investors in the private placement market are expected to become comfortable with renewal risk, particularly when extension options are embedded in customer contracts and viewed as likely to be exercised. This comfort is more likely in a multi-asset financing structure, which allows for risk diversification. Additionally, favourable conditions such as asset location within prime data centre locations (FLAP-D) and attractive lease rates - will be essential.

For more information about bespoke private placements, see our article on this topic: Bespoke Private Placements: An Alternative Source of Debt Funding in Europe

Credit Tenant Lease (CTL) financing

A Credit Tenant Lease (CTL) is a financing structure whereby an asset is leased to a tenant with a strong credit rating under a long-term net lease, typically for 10 to 20 years. In a net lease, the tenant is responsible for operation and maintenance of the asset and bears all related costs, including property expenses like insurance and taxes.

While project finance structures do expose lenders to tenant-related risks - given that repayment depends on the tenant's lease payments - a CTL concentrates that risk even more squarely on the tenant. In a CTL the data centre owner may lack creditworthiness or sector experience, but this is largely immaterial. The owner's role is limited to holding title to the asset, with no operational or financial obligations under the lease.

A CTL setup ensures a predictable income stream for the asset owner and lowers the lender’s risk, allowing for more favourable financing terms such as reduced interest rates, higher loan-to-value ratios and sometimes no equity requirement from the borrower. For a CTL structure to be viable, it is crucial that the tenant is both willing and capable of operating and maintaining the asset independently. This is because under a net lease, the tenant assumes all operational and maintenance responsibilities. In contrast, typical hyperscale customer contracts place these obligations on the owner, who has the specialised skills, workforce, and experience required to manage such complex assets. As a result, only a limited number of market participants are equipped to structure CTL financings, given the fundamentally different risk and operational setup involved.

For further insights, please refer to our article on this topic: Credit Tenant Lease (CTL) Financing

Securitisation (ABS)

We have recently seen the emergence of data centre securitisations in Europe, with two deals completed to date, marking a notable development in the market. However, whether this signals the beginning of a broader trend remains uncertain, as several hurdles persist. One of the most significant is the absence of a unified regulatory and legal framework across European jurisdictions, which makes cross-border securitisation particularly challenging. Nonetheless, where portfolios are concentrated within a single, well-regulated market, the conditions are more favourable. This has been demonstrated by recent transactions in the UK and Germany, where scale and maturity have supported successful execution. A further challenge to the growth of this asset class within the ABS world has been the differences in rating approaches taken by the major credit rating agencies – some historically viewing data centres as simply a sub-sector within the real estate markets and others viewing the assets as infrastructure, resulting in the application of different rating methodologies. As the market develops, we are seeing a greater consistency of approach and it is likely that data centres will come to be viewed as an asset class in their own right for the purposes of credit assessment and ratings. This reflects a convergence with the approach taken in the bank finance market.

Please refer to our articles on data centre securitisation:

The sky's the limit, David Shearer, Christian Lambie, Andrea Salsi, Mirella Hart

Metamorphosis or mutation, data centre securitisation is evolving (DC-ABS), Christian Lambie, David Shearer, Andrea Salsi, Mirella Hart

Conclusion

The market for data centre financing is increasingly mature, with the European market exhibiting a vast array of products from early stage bridge financing, through project and portfolio financings, to debt capital markets solutions. This is a demonstration of the depth of capital looking to invest into this core asset class.

However, there is no ‘normal’ and in each case hybrid terms to suit the particular commercial drivers and sensitivities are typical. It is important to be able to navigate experiences of the various different models in order to find solutions that address the interests of all stakeholders in the context of the particular risk profile of any transaction.

The rise of AI-focused data centres introduces a fundamentally different operating and financing model compared to traditional cloud facilities. For developers, the need to fund both the shell and the core infrastructure significantly increases capital intensity and risk exposure. At the same time, lenders face increased credit risk due to shorter contract durations, technology risk and counterparties often being new entrants with a different credit profile and track record compared to hyperscalers. These factors collectively demand innovative financing structures and a more rigorous approach to risk allocation, making this segment far more complex than the well-established hyperscale model.