Europe’s AI debt rush

EUROPEAN banks and investors could soon find themselves at the centre of a much bigger financing push as the region accelerates spending on artificial intelligence (AI) infrastructure and looks to reduce its dependence on US technology.

Billions of dollars of new debt could flow into European markets as data centre operators begin raising capital for the next generation of AI infrastructure, creating a new opportunity for banks that are positioning themselves early.

According to a recent Bloomberg report, JPMorgan Chase & Co and Goldman Sachs Group Inc are among the Wall Street banks lining up to finance Europe’s AI debt boom.

Both banks have assembled specialist teams to pitch financing to data centre operators and investors, as Europe tries to close its infrastructure gap with the United States.

“There hasn’t been a great deal of issuance here, but there has been intense investor focus,” Noah Roth, JPMorgan’s London-based head of EMEA leveraged finance, tells Bloomberg.

“There’s a lot of FOMO (fear of missing out).”

That shortage of supply could change quickly.

Goldman Sachs estimates that between US$5bil and US$10bil of data centre bonds could reach European markets by the end of this year, with a much larger wave expected in 2027.

The contrast with the United States is already stark.

More than US$350bil in AI-related issuance has taken place in the United States so far this year, according to data compiled by Bloomberg.

Risky reliance

Europe is starting from a much smaller base, but the pressure to build is arguably greater.

European policymakers are increasingly concerned that dependence on overseas technology could leave the region vulnerable, while the United States is already dealing with concerns over the risks and resource demands associated with rapid AI expansion.

European Central Bank president Christine Lagarde has warned that reliance on US technology could give Europe’s trading partners significant leverage.

“Regardless of whether or not we have a European champion in AI, Europe will need to have data centres, for European security and for data sovereignty,” Giacomo Reali, a leveraged finance partner at Linklaters, tells Bloomberg.

The financing opportunity could therefore extend well beyond the initial batch of data centre bonds.

Bloomberg Intelligence estimates that Europe may need about US$3 trillion through 2035 for cloud infrastructure, data centres and other critical technologies.

Until now, smaller European projects could largely rely on banks, project finance and securitisation.

Larger facilities, however, will require access to deeper pools of institutional capital.

One example is Start Campus, which is planning a 1.2-gigawatt facility in Portugal. Projects of this scale could increasingly bring investment-grade and high-yield debt markets into the financing mix.

Huge requirements

AI-related debt currently accounts for about 5% of European high-yield issuance, compared with 19% in the United States, according to Dealogic and Goldman Sachs research cited by Bloomberg.

That gap points to the potential size of the European opportunity if more large-scale AI infrastructure projects get off the ground.

Goldman Sachs expects individual projects to generate sizeable financing requirements.

Each new 100-megawatt to 200-megawatt data centre in Europe could translate into debt deals of at least US$1bil to US$2bil, according to Miriam Wheeler, the bank’s global head of leveraged finance.

She estimates Europe’s share of the global AI build-out could eventually increase to as much as 25%, from around 10% currently.

“We think if you start seeing more of that mega capital expenditure come to Europe, then you’ll start to see it financed in the 144A market, investment-grade and non-investment-grade,” Wheeler says, according to Bloomberg.

The development of Europe’s AI debt market is nevertheless unlikely to be a simple copy-and-paste exercise.

The first European high-yield data-centre deals are expected to borrow heavily from the US model, with issuers initially favouring straightforward structures to establish a track record before experimenting with more customised financing.

There is also a sizeable education exercise ahead for lenders and investors.

Many of the projects requiring billions of dollars in capital have yet to be built, making it harder for investors to assess their long-term risks.

Data centres also consume large amounts of electricity and water, increasing scrutiny from lenders with environmental, social and governance mandates.

The AI investment rush may be generating plenty of interest, but that does not mean investors are willing to finance every project that comes to market.

The experience of the European market’s only data-centre bonds in the junk market also highlights the risks.

The bonds issued by CoreWeave Inc have traded below face value since news emerged that major client Meta Platforms Inc was developing a competing cloud-infrastructure business.

“The threshold and diligence we need to do are quite high,” Sid Chhabra, head of securitised credit, CLO management and euro high yield at RBC BlueBay, tells Bloomberg.

Investors have already started doing more groundwork.

In July, some travelled from London to Slough to tour data centres owned by Equinix Inc. The trip was notable given that the bond deal they were assessing was only worth £280mil (US$377mil).

The response showed just how scarce AI-related debt remains in Europe.

Orders for Equinix’s asset-backed securities ultimately exceeded £510mil, despite the relatively small size of the deal compared with the enormous sums expected to be required for the wider AI infrastructure build-out.

For investors, such transactions offer an early way into a market that could become considerably larger as Europe’s data centre ambitions move from planning to construction.

“We will see companies in the sector ultimately needing to raise billions from the market,” Ben Thompson, head of EMEA leveraged finance capital markets at JPMorgan, tells Bloomberg.

“We will see how big that number can be.”