Banks eye Malaysia data centre boom
Yondr Group is preparing to make its debut in the Asian syndicated loan market with a deal that is expected to herald a slew of debt financings for data centre developments in Malaysia.
Malaysia is on the cusp of a data centre construction boom, with operators including AirTrunk, EdgeConnex, GDS Holdings, WinTriX DC Group's Bridge Data Centres, Logos, Microsoft and a unit of Singapore Telecommunications all looking to build facilities.
The around US$835.5m financing for Yondr will support the build-out of one of several phases planned for the construction of a 300MW facility in the southern state of Johor, the largest hyperscale data centre campus in South-East Asia.
The rise of artificial intelligence and strong demand for related infrastructure have made the scale of data centres bigger, with multiple phases of construction involved.
Data centre operators have been largely dependent on private equity funds for capital, but they are diversifying their financing sources to meet growing demand, according to Joel Cheah, chief financial officer for APAC at Vantage Data Centers.
“As the industry is so capital-intensive, operators are looking at alternate forms of financing including debt financing, private credit, bond takeouts and other alternatives to raise incremental capital for business growth,” he said.
This year has already seen a couple of loans raised for data centres in Malaysia. In October, Australia's AirTrunk wrapped up a S$530m (US$402m) sustainability-linked loan to develop part of the JHB1 data centre. In May, Princeton Digital Group raised a US$280m-equivalent ringgit-denominated green loan for the first phase of its hyperscale campus in Johor’s Sedenak Tech Park.
It is no surprise Johor has become the hotbed of data centre activity as neighbour Singapore has massive data consumption but faces space constraints. Moreover, costs for land, power and construction in Johor are lower than in the city state.
Around 434MW of capacity was under construction at the end of June and 1.23GW was planned at the time, according to real estate firm Cushman & Wakefield.
An industry executive estimated the capital expenditure required to be US$10m per megawatt, which would add up to US$12.3bn at the end of June.
Speed to market
The huge scale of development in the works is giving rise to more debt financings with diverse structures.
“Loan-to-cost ratios are getting higher”, said Kelvin Lim, managing director for syndication and loan solutions at DBS Bank. “[They have] risen from 60% a few years ago to 70%–90%, and 80% is the norm now. There is competition on pricing and terms are constantly being tightened.”
A developer’s ability to build quickly is a competitive advantage when it comes to attracting hyperscale offtakers that are keen to use capacity as fast as possible. Developers may thus acquire land and apply for electricity supply to start work on the facility before customer contracts have been finalised.
“From a risk-reward perspective, banks will look at entering into different financing arrangements based on the associated risk assessment,” said Cheah at Vantage Data Centers. “In Japan, we do see financiers being able to start financing the moment you have freehold interest of the land. In some other countries, we notice that they only start the bulk of their debt financing when the lease is signed or there is income productivity guaranteed.”
While several data centre operators have relied on private equity for capital in the early stages of development, others have turned to banks or private credit lenders for equity bridge loans.
“As developers build up their portfolio of completed assets and there is a stream of cashflow coming in, they are starting to ask banks to lend against that or a corporate guarantee as an equity bridge while they build the core and shell of a project while they are in the midst of negotiating a long-term offtake contract,” said Lim. “Subsequently when the offtake agreement is signed, we can take out the bridge with another financing.”
Another structure used for speed is to establish a financing framework with pre-agreed conditions or criteria to add on incremental facilities that can be used for subsequent projects.
AirTrunk’s S$530m five-year delayed draw term loan from earlier this year was an incremental facility added to a A$4.665bn-equivalent (US$3.11bn) SLL the company closed in August 2023.
Offtake contracts in Malaysia range from five to 15 years, but the tenors of a project loan tend to be shorter.
“The longer the tenor, the more expensive the loan is, so developers use shorter tenors to optimise the cost of financing,” Lim said.
Banks prefer to fund when at least 70% of capacity is contracted, but the identities of the offtakers and sponsors also matter.
For example, Chinese data centre operator WinTriX DC Group, formerly known as Chindata Group, faced concerns about offtaker risk and geopolitics when it syndicated a five-year loan of up to US$490m earlier this year to refinance a bridge financing.
Its largest customer is ByteDance, which accounted for over 80% of revenues, and some potential lenders found it difficult to win approvals with an offtaker whose financials are not disclosed and which has faced calls from US lawmakers for its short video platform TikTok to be banned.
While the loan markets have largely captured the financing opportunities, other asset classes are also gaining traction in raising capital.
On Thursday, Australian alternative asset manager HMC Capital issued the prospectus for a A$2bn (US$1.3bn) IPO of Digital Infrastructure REIT (DigiCo REIT), a data centre operator with 13 properties in Australia and the US.
AirTrunk’s portfolio of more than 755MW of data centre capacity in Australia is also sizable enough to tap other parts of the debt markets such as securitisation.
Vantage has already taken a lead on that front, although the financing was completed in Europe. In June, the data centre operator raised £600m (US$760m) in securitised term notes to refinance £480m of debt, marking the first securitisation of data centre assets in EMEA.
“So far in Asia they [developers] have continued to tap the bank market. There is a deep public market in the western developed markets that can provide long-dated capital for completed risk at cheap price, but they tend to need a certain minimum size for it to be efficient,” Lim said. “I think that market will grow in Asia over time as more of these data centres and other completed projects come up.”