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- [00:00]
Narrator/Advertiser
You're being sold an AI future where you're obsolete or irrelevant. That vision is wrong. At Palantir, they're building AI that helps workers and unlocks their full potential. American workers are our nation's greatest strength. AI shouldn't eliminate them, it should elevate them. Palantir is here to tell their stories. From factories to hospitals, AI is freeing people from drudgery, letting them do what humans do. Create, solve, build. Palantir. Making Americans irreplaceable.
- [00:37]
Joe Wiesenthal
So let me get this straight. Your company has data here, there and everywhere, but your AI can't use the data because it's here, there and everywhere?
- [00:48]
Travis Wofford
Seems like something's missing. Every business has unique data.
- [00:52]
Joe Wiesenthal
IBM helps your AI access your data wherever it lives. To change how you do business, let's create Smile to business.
- [01:00]
Travis Wofford
IBM.
- [01:05]
Narrator/Advertiser
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- [01:36]
Joe Wiesenthal
Hey, Ryan Reynolds here wishing you a.
- [01:38]
Travis Wofford
Very happy half off holiday because right now Mint Mobile is offering you the gift of 50% off unlimited. To be clear, that's half price, not half the service. Mint is still premium unlimited wireless for a great price.
- [01:52]
Joe Wiesenthal
So that means a half day.
- [01:55]
Travis Wofford
Yeah, give it a try@mintmobile.com Switch upfront.
- [01:59]
Tracy Alloway
Payment of $45 for three month plan equivalent to 15 per month required new customer offer for first three months only. Speed slow after 35 gigabytes of network's busy taxes and fees extra. See mint mobile.com.
- [02:09]
Joe Wiesenthal
Bloomberg Audio Studios podcasts Radio.
- [02:25]
Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Wiesenthal.
- [02:29]
Tracy Alloway
And I'm Tracy Alloway.
- [02:30]
Joe Wiesenthal
Tracy, you know, we've obviously been doing a lot about data centers, but one thing that's sort of becoming interesting is they just seem so complicated. There are so many different moving parts. And I don't mean like technically complicated, although that's part of it. But they really are this sort of weird thing where they're a high tech thing. They have the most advanced chips, or at least some of them have the most advanced chips in the world. The real estate plays and we talk about Securitization and so forth. And then they have to figure out all the stuff of how they're going to connect to the grid and maybe they're going to build their own power plant inside the data center, et cetera. There's a lot of moving parts.
- [03:03]
Tracy Alloway
Yeah, there's a couple of things here. So number one, it does seem to be a complex space. And whenever I think about how some of these things are being financed, I get that. What's the meme with the guy standing in front of the board with like all the papers and string connections?
- [03:16]
Joe Wiesenthal
Oh yeah, exactly.
- [03:17]
Tracy Alloway
It all feels a little circular sometimes, that whole ecosystem. But, but the other thing is just the sheer scale of the like financing requirement for doing this. So I was reading a Morgan Stanley report, I think it came out over the summer. They were forecasting 2.9 trillion of global data center spend through 2028. And just for context, total capex spending by all companies in the S&P 500 in 2024 was 950 billion.
- [03:45]
Joe Wiesenthal
That's crazy. Yeah. And by the way, the numbers are mind boggling.
- [03:48]
Tracy Alloway
Well, the other big question is if you actually stack that up against existing revenue from generative AI, existing revenue is like 16 billion. So there's like there's a bit of a gap there that needs to be filled.
- [03:59]
Joe Wiesenthal
Right. Completely correct. The other thing that strikes me as very interesting and tricky is you have these projects and put out this big capital outlay, capital commitments, et cetera, and then the timelines like oh, when do you get connected to the grid? When does that turbine for your insight gas generator you get actually get delivered? Maybe 20, 30, etc. So it feels like I get the impression you're dealing with very uncertain timelines. And so how you establish that in the language so everyone feels protected, like what if you could ever get connected? What if anything could happen? Right.
- [04:30]
Tracy Alloway
What are the expectations for when this actually starts to pay off, when does.
- [04:33]
Joe Wiesenthal
It pay off, what are the obligations of the tenant, et cetera? We don't really know. Anyway, I'm sure it's different in everyone. So many more questions. We're just scratching the surface.
- [04:42]
Tracy Alloway
Yeah, absolutely. And you know, there have been some interesting things happening. So a lot of the activity has been done in the private market, but obviously AI players and companies have a lot of different options so they could go to securitized markets. And I think we've been seeing some CMBS and ABS deals there. Private credit, I mentioned private equity, bank lending or they can go the public route into corporate bonds and so I'm really curious how a lot of these players are choosing between those options.
- [05:09]
Joe Wiesenthal
Well, I'm really excited to say we have the perfect guest. Someone who is really at the intersection of sort of every one of the things that these data centers are also at the intersection. We're going to be speaking to Travis Wofford. He's a partner at the law firm Baker Bots. He is the chair of the corporate department based in Houston. He works on all of these things. He can tell us what's in the details of all these agreements. So, Travis, thank you so much for coming on outlets. Great to have you here in studio.
- [05:34]
Travis Wofford
Thanks for having me.
- [05:35]
Joe Wiesenthal
Why don't you give us just a quick overview of what's your role at Baker boss? What do you focus on? What do you call it? A practice area? Is that a legal firm? A legal term?
- [05:44]
Travis Wofford
Yeah. So I'm a deal lawyer. I help people build, buy, finance and sell projects and companies. And so we take multidisciplinary teams and put them together in order to actually make people's dreams a reality is the way I like to explain it. The idea is somebody comes to us with a very complex project and they need an integrated solution, legal solution to that problem. So you want to build a data center, you've got power. You need people that actually understand the air, the water, the interconnection with the fiber, the interconnection with power, the land, everything else. And then the finance layer on top of that. We provide a one stop shop for that.
- [06:24]
Tracy Alloway
Okay, so my question is, how busy are you right now? Are you just getting, you know, requests flying at you constantly?
- [06:31]
Travis Wofford
Yes, we are very busy, which is a good thing and it's a bad thing. Right, because you're capacity constrained just like your clients are.
- [06:38]
Tracy Alloway
My husband is a former lawyer, so I know how bad it can be.
- [06:42]
Travis Wofford
Yes, but the good thing is they're interesting deals. It's interesting stuff to work on. It's in the news on Bloomberg as well. And that makes it fun.
- [06:50]
Joe Wiesenthal
It seems like at Baker Bots, with like the long history based in Houston, all the energy stuff, I mean, this is all sort of novel to everyone, right? Especially the generative AI data center. Like that aspect is just a couple years old. Can you talk about when there is a new thing that everyone gets excited about that maybe even a couple years ago no one was talking about? Now granted, I know data center is a lot longer than a couple years old, but the explosion of interest, how do you build that sort of team that understands all of the dimensions so that you can provide that one stop shop service.
- [07:24]
Travis Wofford
Yeah, so it's a really good question. And you know, I always go back to the expression there's nothing new under the sun. When you actually think about what we're doing, you're building a power project, you're building out a data center, the powered shell or the powered land or the like. People have been doing that before. When you're financing these, we're actually using a lot of the same financing structures. It may not be exactly the same, but it rhymes. So 10, 20 years ago, we were doing whole business securitizations of cell towers. That same securitization technology, you moved forward to residential, solar, and now you're moving that same thing forward to CMBS and ABS of the data center. So they're very similar. The rating agencies are very familiar with these things. You have to look at a few different variables and understand them slightly differently. But particularly energy infrastructure and telecom infrastructure, those are two things that we've been doing for decades.
- [08:17]
Tracy Alloway
Oh, walk us through the differences then between say, you know, a cell tower ABS or I don't know, a solar power ABS versus a data center ABS or cmbs.
- [08:27]
Travis Wofford
Sure. So a cell tower abs, really when you're looking at that, you just have the tower, it's on land, you may have somebody that's coming along in order to mow the lawn around it, but they don't have much in terms of the actual equipment that's on top of the cell tower. When you have a residential solar securitization, you put the solar panel on top of somebody's roof, you're contracting, the cash flows off of that. Again, on the cell tower, you're contracting, the cash flows off of that. You pull those together and then you put a bond on top of it. With a data center securitization, what you're doing there is you have the cash flow from the data center lease, you have the cash flow from other aspects of the business that may be going along with that, like related to the power and some of the additional services. You pool those, you have long term contracted cash flows and then a rating agency can rate those as well. But at the end of the day, you're trying to make sure that you have a special purpose vehicle that has all of the assets that it needs within it. You have a separate entity that's handling the billing in the collection, an entity that's handling the operation and maintenance of the asset. And that's supposed to be a standalone product that can move at least the five to seven years until you get to the anticipated return payment date. And often it's about a 30 year rated final maturity.
- [09:48]
Tracy Alloway
So I have a question, and it's come up a couple times on previous podcasts, but you mentioned, you know, having a special purpose vehicle for this.
- [09:55]
Travis Wofford
Sure.
- [09:56]
Tracy Alloway
Why does it seem that so many big tech companies who are in the AI space, who are presumably very, very cash rich and profitable, why are so many of them financing off balance sheet?
- [10:09]
Travis Wofford
They have better things to do with their money. So the return on their invested capital is much better on the tech side than it is on the infrastructure side. Infrastructure is usually low margins, but the benefit with that is it's long term, reliable, understood assets such as again, if you're doing a large energy project or even the powered shell itself, it's land, it's a building, it's got the fiber connection, it's got the power connection and that's something that can over a long period of time. Whereas on the tech side they make a lot more money and have much greater margins as we all know.
- [10:47]
Joe Wiesenthal
Right. So this aspect of the business which is could be very profitable, but it's stable, it's very predictable. It's like, let's outsource this, let's have some other entity house that risk. What are the risks in data center finance? When you think about the other side, not the tech companies, but the lenders to the spv and we'll talk about the different structures that that credit form can take. What are the risks? You know, it's a fairly stable long term thing, but how can things go wrong?
- [11:13]
Travis Wofford
So it depends on what exactly you're financing. Right. So in a securitization and abs, what you're doing is you are financing the business of this powered shell or turnkey solution. The tenant quality is very important. Do I have somebody that has the investment grade tenant quality or diversified pool of high credit quality tenants who can.
- [11:34]
Tracy Alloway
Actually just to be clear, you're securitizing the cash flows from the data center leases, right? Ye.
- [11:39]
Travis Wofford
Yeah. So exactly. So on an abs, it's a focus on the business of this data center. The actual lease is in the securitization and then the hard assets are in there as well. In a cmbs, you have the lease as well, but it's more focused on the mortgage. And then we have credit tenant leases as well which are kind of directly to the tenant.
- [12:01]
Tracy Alloway
That's useful, thank you.
- [12:03]
Travis Wofford
So risks associated with securitization are usually focused on the tenant quality. They're focused on the term of the lease. How long is the lease? If you have a 10 or 15 year lease, if you have a shorter term lease, you're going to look a little bit more at well, is this something that's going to need to be released in that time frame? What is the rate on the lease? If it's a below market lease, it's much less likely that somebody's going to want to get a new lease and leave you. And then the facility itself, is the facility going to be able to withstand kind of technology risk over a long period of time?
- [12:39]
Tracy Alloway
So how are people structuring the deals at the moment to compensate for that risk? So you have the time mismatch, you have maybe tenancy rollover risk as well. Are people like adding extra credit protection or how are they making these palatable to investors?
- [12:55]
Travis Wofford
So one is the loan to value your advance rate. So typically if you're looking for something that's an investment grade securitization, you're going to have it around 40 to 50%. The structure of the bond itself will have a rated final maturity. That's much further out than the lease, maybe 25, 30 years. But you're anticipating that the full principal amount of the bond would be able to be repaid within five to seven years. But the lease itself is a 10 year lease or a 15 year lease and then that can get re upped for another 10 years on top of that. So when you're looking at your cash flows, the cash flows are going to to support your ARD prior to even worrying about ard, the anticipated repayment date of the bond prior to even worrying about your release.
- [13:46]
Joe Wiesenthal
So one of the things that sort of like people tweet about and people even write about, including us, and we've talked about even this whole thing about GPU life and some of these questions regarding the long term value of the assets. And people like, you know, like to claim, oh, they're not going to be as valuable long term as people think. Does this come up in your work and like what is, what's really going on here? Sure.
- [14:09]
Travis Wofford
So it depends on what the financing structure is that you're using. So the GPU life itself is more a question on a private credit story or an equity story. On the securitization side, they're more focused on the turnkey data center itself.
- [14:25]
Joe Wiesenthal
All right.
- [14:25]
Travis Wofford
The useful life comes up a lot when you're doing the accounting and that rolls through to the earnings per share of these public companies. You've got a useful life of a few years ago, it was three years for these GPUs. Now some of them are using six years. If you're doing straight line amortization over three years, you're taking about a third off over six years. It's obviously less than that and so you have much less amortization depreciation expense on it. That helps your earnings per share.
- [15:09]
Narrator/Advertiser
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- [15:51]
Advertiser/Promoter
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- [16:46]
Joe Wiesenthal
Foreign.
- [16:50]
Tracy Alloway
Hello and welcome. This is the Michelle Hussain Show. I'm Michelle Hussain. I speak with people like Elon Musk.
- [16:58]
Joe Wiesenthal
I think I've done enough.
- [16:59]
Tracy Alloway
And Shonda Rhimes.
- [17:00]
Travis Wofford
That's so cute.
- [17:01]
Tracy Alloway
This will be a place where every weekend you can count on one essential conversation to help make sense of the world. So please join me, listen and subscribe to the Michael Hussain show from Bloomberg Weekend. Wherever you get your podcasts, you certainly ask interesting questions.
- [17:21]
Narrator/Advertiser
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- [17:51]
Tracy Alloway
What's your impression of how private credit lenders have been handling the GPU aging problem so far? Like, are they conscious of it or are people still kind of basing a lot of their expected cash flows off of GPUs that last, you know, longer because they were previously being used in cloud computing or something? Something like that.
- [18:09]
Travis Wofford
Yeah. So they're very aware of it. Particularly because if you look at the new Nvidia had the H1 hundreds and the H2 hundreds that had come out, then it was the Blackwell, the B1 hundreds, two hundreds, and now Ruben's going to come after that. Right. So every two to three years you have these new chipsets and that. It's almost like, do I want to be financing these laptops that you've got in front of me for six years or seven years? Years. What's the, the replacement cycle on that? So when do I need to get repaid on my debt? The interesting part that comes into it is it's not just one laptop. We're talking about entire data centers full of these things, and that's in the tens, hundreds of millions of dollars. So how are you actually going to get your cash flow back when maybe those aren't going to be used for training the same way? The reality, though, is the useful life of these and the economic life is not just that initial usage, you can use it for other things. So starting out with training, needing to get training done as quickly as possible, if the data center is well located in Virginia or another tier one location, maybe there's inference if it's close to a city or other location, and then for the CPUs, data centers that have those, you can use them for compute and analytics and other technologies and use cases that maybe that wasn't what you originally underwrote, but you knew that that was coming down the line.
- [19:44]
Joe Wiesenthal
Since you mentioned Virginia, can you talk about where we are in 2025 with data center siting and picking locations? So I know that there's tons around Northern Virginia and I know that there are some huge projects in the middle of nowhere in Texas where they're not going to offend any neighbors or whatever, et cetera. What are the big themes that companies are thinking about right now when they think about location?
- [20:07]
Travis Wofford
Yeah. So one of the great things about Virginia is connectivity to the subsea cables. So getting to Europe, getting to Africa, getting to other locations and the rest of the United States. There's a great regulatory environment there in terms of power, in terms of actually building out the infrastructure there and other data centers so that you can have, I hate to use the word co located, but connectivity within other data centers makes it very attractive. The problem is it's saturated. It's a very saturated market. And so if you want to build that next large giant data center and you need power or you need water or you need other parts of the infrastructure and you need to do it quickly, you're often going to look elsewhere. That's one of the reasons that Texas and ERCOT have become so attractive.
- [20:56]
Narrator/Advertiser
Yeah.
- [20:56]
Tracy Alloway
So one of the things we hear constantly is that chips and financing are not necessarily the big choke points for doing this. It's more the power. And I guess I'm curious, is it really a power shortage problem or is it more the distribution of power is not in the places where these data centers, you know, want to be because of convenience, like colocation.
- [21:16]
Travis Wofford
It's.
- [21:17]
Tracy Alloway
You can say both as well.
- [21:18]
Travis Wofford
Yeah, it definitely is both. I will say though, that with power, it's interconnection, it's getting that actual permission both for the load. So the data center itself is drawing power from the grid and for the generation. And those are two separate interconnections on these larger facilities that you're going to be getting at relatively the same time. And if you can't have both, then you're probably not going to be able to support such a large facility. So on the generation side, if you're trying to get interconnection, you go through a long process, potentially with FERC and with your ISO or rto, you know, ercot, if you're in Texas, to do typically at this scale, like the large data center scale, like a five year process in order to get that generation approved and interconnected and it's.
- [22:11]
Tracy Alloway
That's just the approval. Five years and then you have to actually do the connection.
- [22:15]
Travis Wofford
Yeah. And then you got to build it.
- [22:16]
Tracy Alloway
Wow.
- [22:17]
Travis Wofford
The fun part about that is that timeline. A lot of people walk in and they think, oh, I've heard that it's going to be 18 to 36 months in order for me to get this done. And then a month or two goes by and they get a new date and it's been pushed out. And then a few months go by and they get a new date and it's been pushed out and one of the analogies we use is like you're waiting in the airport to get on the plane and they call, I fly United all the time. They're like, oh, it's global services. Okay, Global services, go forward. And now armed services. Okay, Armed services and people with young children. And you just, you realize that that first class ticket that has, you know, boarding group one doesn't mean that you're getting on first.
- [22:59]
Joe Wiesenthal
Well, you all get there at the same time. At least this is how I. Cause you know, I don't like waiting there either. But I was like, you know what I'm getting? I'm going to arrive at the destination the same as all these people with children and everything. So it's hot. Anyway, you know, there was a story recently, Core Weave, one of the big neocloud companies sort of lowered a growth forecast because of delay in a third party data center project, which is exactly sort of what you're talking about. These things. How does that affect the financing? This uncertainty of when you can actually plug these things in or when they're going to get approved? Because that sounds very frustrating. And time is money. And so how does that interact with the credit component?
- [23:37]
Travis Wofford
Yeah, so you kind of have three categories in the timeline of one of these projects. You have your development capital that's often equity funded. You have your construction capital, so you get a big construction loan once you've got your permits and your power. And then after that's been completed, then you do your takeout financing that maybe the securitization and the like has the.
- [23:59]
Joe Wiesenthal
Regulatory, I guess, political environment. Does it feel like it's significantly changed in the last six months? So you talk about like, you know, very few people were talking about water. My impression is that the water component specifically is very overrated based on things I've read. But it obviously is a matter. But, you know, the public is really concerned about water. The public is clearly concerned about electricity prices. People are showing up to town halls to protest or to voice their opposition to new data center projects in the areas where they live. Does it feel like the environment today when we're talking in December 2025 is meaningfully different than it was at the start of the year in terms of public awareness of all this stuff.
- [24:36]
Travis Wofford
So politically, absolutely right. I think that the community organizers and there are a lot of organizations, organizations that kind of make their money based on outrage around these types of things. They've realized that this is a great opportunity for them. And if you look at the sustainability reports of a lot of the Hyperscalers and others, they talk about being water positive. It doesn't mean that they're just happy about water. It means that they're actually trying to have a positive impact and they'll start putting money into the watersheds and the like and water replacement. And that actually is really meaningful as a part of the story that I think a lot of the folks that are thinking about the political aspect of this don't realize, which is when these data centers come in and the balance sheets of these hyperscalers come into an area that's largely been overlooked. You know, it's that New Yorker magazine cover where, you know, you're looking from.
- [25:27]
Joe Wiesenthal
The east river through Manhattan and then it's California. Right?
- [25:31]
Travis Wofford
Exactly. A lot of these areas are. Are underinvested, particularly in infrastructure. And a hyperscaler comes in and starts saying, well, you know, this water treatment facility isn't sufficient. We need to build it out. That's very meaningful. Part of that interconnection study that we're doing, you're looking at the electric transmission of the area. That is very meaningful. But water, for the developer, it's not a problem unless it's actually a problem. What I mean by that is we have a lawyer on several lawyers on staff that focus on water. And one of them, for example, knows all 98 water districts in Texas and knows which one you are supposed to go to if you want to get your project done quickly and which one to avoid. So that's something that, if you mess it up, could really affect your timeline.
- [26:18]
Tracy Alloway
Wait, now I'm really curious. What would make one water destination more attractive versus the one you want to avoid? Is it just regulatory hurdles or is it, like, quality of the water?
- [26:28]
Travis Wofford
So it's not quality of the water. You know, if it's potable water, it's potable water. It's both water supply and then water offtake. So one of the issues in oil and gas in Texas that they've had is where do we get all the water and what do we do with all of this wastewater? It's the exact same thing with data centers. Obviously, they're putting different chemicals into the water in order to put it into the facility. But it's still a chemically treated water that has to be processed before it can go back either into the drinking supply or into, you know, the rivers and streams.
- [27:00]
Joe Wiesenthal
And so just back to the political environment. Like, what's that doing on the ground today? This big change that's occurred because everyone's up in arms about all this Stuff, how is that affecting some of the project planning that exists today?
- [27:13]
Travis Wofford
So I think that the developers have been very mindful in the past, but they're even more so now because of the sensitivity around it. In certain states they are considering proposals that might involve moratoriums on data centers. Yeah, that's not the case in Texas. If you look at what Governor Abbott and the legislature have been doing, they're pushing a more data centers, more tax incentives, more infrastructure. I think Virginia and several other places realize how important it is to their economies as well and to their tax base because data centers produce a lot of tax revenue for these states, which go to help fund schools and the like.
- [27:48]
Tracy Alloway
Is anyone talking about public private partnerships in the data center context? I feel like this is something that like comes in waves. People start getting really, really excited about like public private partnerships for infrastructure build out and then you don't hear about it for like five years and then it comes back. Are we in one of those waves right now when it comes to data center spend or really?
- [28:08]
Travis Wofford
Yes, so. So I'm thinking about what I can say. So the, the short answer is yes, those are being explored. They're both from the perspective of public private partnerships, but also from the perspective of like the Department of Energy loan program office. Oh, right, you worked on that and the others. Yes, they can provide financing support and the Department of Energy has been very vocal about what the loan program office offers. The, the Department of Defense, Department of War, I guess now also has programs that they can make available. Some of these are actual grants, some of them are loans, but separate it. Apart from that, there's loan guarantees. And so you have a backstop by the federal government of a loan that, let's be honest, if you're at 40% loan to value and you've got investment grade tenant that's going to be paying the lease longer than the term of the bond, do you really need it? Probably not, but it can help lower the cost of capital. Anyway.
- [29:06]
Joe Wiesenthal
Actually say more about that because we did several episodes, we've done several episodes about the idea of loan guarantees or particularly the loan programs office, but from the private side, like talk to us about how that functionally turns into okay, we're going to get a better credit rating or this is going to crowd in private capital as they like to say what happens? What is the steps via which the government's role suddenly unlocks this financing?
- [29:30]
Travis Wofford
I think in all credit, when you're trying to underwrite any kind of loan, you want to see what are the cash flows or what's the collateral and am I going to get paid back? What's the likelihood? Right. And one of the things that the frameworks I think of are show me who you walk with and I'll show you who you are. Right, okay, fine. If you have the United States government that is providing a backstop, then I can be confident I'm going to get paid back. If, if it's Microsoft or Google or another who's providing a guarantee on a project or the loan, then I'm very comfortable that I'm going to get paid back. When you put these types of things together, that means I don't have to charge you an extra incremental amount to protect me from that credit risk. And that extra money that you keep in your pocket you can then turn into additional projects. And it's a Velocity of Money concept.
- [30:25]
Tracy Alloway
I want to go back to private credit for a second because you know, as you mentioned earlier, a lot of these deals have been done in the private credit space so far and companies have a lot of options when it comes to financing. As I mentioned in the intro, they can go the public route, they can securitize, they can go to private credit. And whenever people talk about private credit in the context of AI, they always say vague things like oh, it provides customizable financing options and stuff like that. Or what exactly is the attraction of private credit for data centers and AI build out?
- [30:59]
Travis Wofford
So one of the most attractive things that private credit can but doesn't always offer is non dilutive capital. Right. Equity is dilutive and equity is very expensive. There's that risk premium that's associated with it, private credit. There is an assumption in the story that because of the extra protections that they receive, the they don't need the same equity risk premium. So a lot of them are looking at maybe a 15% IRR. They might charge you 10 to 12% upfront. But then because of the MOIC that basically their minimum return on the capital that they'll get paid or an IRR premium over time in the takeout, then they'll have a catch up on the back end the equity. They're taking a percentage of what you at the end of the day are going to get and it's usually a much more expensive of peace private credit.
- [31:49]
Joe Wiesenthal
But what about private credit versus other forms of credit like bank lending or the public bond market or something?
- [31:54]
Travis Wofford
Well, can you get it?
- [31:55]
Joe Wiesenthal
Well, I mean that's, I mean what is, that's the. I don't know, I mean the underwriting.
- [31:59]
Travis Wofford
Standards for private credit can be riskier than what you would have from, you know, a bulk bracket bank's credit desk.
- [32:22]
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- [33:23]
Joe Wiesenthal
I'm Barry Ritholtz, inviting you to join me for the Masters in Business podcast. Every week we bring you fascinating conversations with the people who share shape, markets, investing and business CEOs, fund managers, billionaires, Nobel laureates, traders, analysts, economists, everybody that affects what's going on in the market. Whether you own stocks, bonds, real estate, commodities, crypto. You really need to hear these conversations. Sometimes it's behaviorists like Dick Thaler or Bob Shiller. Some sometimes it's fund managers like Peter Lynch, Bill Miller, Ray Dalio. Sometimes it's authors. Michael Lewis, author of the Big Short and Moneyball. Regardless of the conversation, these are the folks that move markets each week. That's the Masters in Business podcast with me, Barry Ritholtz. Listen on Apple, Spotify, or wherever you get your podcasts.
- [34:23]
Tracy Alloway
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- [35:19]
Travis Wofford
So when you are thinking about larger investment grade bonds and debt in data centers, normally you are thinking about wholesale data centers where there's one tenant that has that facility and that tenant has investment grade credit quality.
- [35:38]
Advertiser/Promoter
Right.
- [35:38]
Travis Wofford
It's much less likely that you are going to have a pool of non investment grade tenants in a kind of colocation style data center. And then because of that, Fitch or S and P or Kroll is going to give you this investment grade rating. So I don't think that the expectation should be that you're going to get a investment grade rating on a pool of non investment grade tenants, at least not right now. I think that eventually when you've got thousands of tenants across hundreds of data centers, that becomes much more attractive. It's just not really where the market is right now.
- [36:16]
Joe Wiesenthal
We did an episode a few months ago in September actually where we're talking to this guy, Don Wilson in Chicago is setting up a futures trading firm for GPUs and theoretically it could hedge your GPU costs. As you think about the industry going forward, could you see that being a useful instrument for data center financing? I'm a little concerned about is the value of this collateral going to stay? I want to hedge the GPU exposure. Could you see over time it maturing and that being a valuable thing?
- [36:46]
Travis Wofford
I love new finance tools. I think that that kind of created creativity is really important. There's always an opportunity there. The, the thing I have noticed with the data centers, just with other asset classes, is that there's always a cash flow stream that is not being utilized. And so for example, if you have a securitization or really any bond, you're not necessarily going to get credit for, for everything in it. So your contracted cash flows, if that counterparty is an investment grade, may not get an advance rate, a loan to value on that. Somebody else should be there in order to take advantage of that and provide you with additional capital that you can then reinvest into development.
- [37:31]
Tracy Alloway
So last week we had a big outage at the CME and futures were basically frozen for like 10 hours or something. And this was because of an issue at one of the CME's data centers, which is operated by a company called Cyrus One. Is there a reputational or operational risk that either deal structures or investors need to be aware of when it comes to these financing arrangements.
- [37:55]
Travis Wofford
Reputational or in what regard?
- [37:57]
Tracy Alloway
Well, for instance, if Cyrus1 has a big meltdown at one of their data centers which seems to have happened because one of their cooling centers reportedly malfunctioned, is that something that then gets priced into the financing arrangement or is that something that investors should be concerned about?
- [38:15]
Travis Wofford
So these are definitely things that investors underwrite too. So if you are a blue chip operator and developer, you are going to have a lower cost of capital than you would otherwise. There are a lot of Johnny come lately's into data centers over the last two years since AI has really come to the forefront. The people that have been doing it for a decade, they know what they're doing and they're very good at it. And that doesn't mean that there aren't going to be problems. Things blow up.
- [38:47]
Tracy Alloway
Sometimes squirrels chew wires.
- [38:49]
Travis Wofford
Yeah.
- [38:50]
Tracy Alloway
Hopefully not subsea ones.
- [38:52]
Travis Wofford
There are accidents all the time. But that's part of why you have these pretty incredible engineering studies that are done in order to actually put these things together and freak accidents happen and. And you know that's part of the.
- [39:08]
Joe Wiesenthal
Credit risk we just compared to other sort of real estate plays. Is there more sort of, I guess operational risk in a data center than in other, you know, for just some sort of retail distribution facility? I imagine this sort of operational risk isn't going to be as great in something like that.
- [39:27]
Travis Wofford
Yeah, that. So that's part of why they have these service level agreements within the data centers themselves where the operator is agreeing to provide an uninterruptible non intermittent power. That's one of the big things that people focus on. And how do the terms of that contract work and what are the backstops? You could have a reserve account associated with it so that if there are payments that are necessary to be made, that there's just cash sitting there ready to go. Normally people are thinking that that would reduce the cash flow on the bond and that would reduce at the end of the day the equity distribution coming from the SPV as opposed to affecting the, you know, the payment on the bond.
- [40:10]
Tracy Alloway
That reminds me actually, are you seeing a big surge in demand for like data center insurance or for people, you know, who want to ensure not just against operational risk but cyber risk and things like that?
- [40:21]
Travis Wofford
Yes. So one of the wonderful things about any kind of economic activity is that the insurance market is always there to support it.
- [40:29]
Tracy Alloway
Well, like the lawyers as well, right?
- [40:31]
Travis Wofford
Yeah, definitely. Give us a call. Right. The reality though is there are products that data centers have had for decades. And then there are new risks that are coming up just because of how AI training works. You can always go to Lloyd's of London in order to get a specific policy if necessary. But for the most part, these are risks that have already been priced in and there are products that are already there. Now there's talk of, well, there are products that exist in terms of getting an insurance product to handle your technology risk. So does the product work at the end of the day or does it become obsolete too quickly? That looks more like a bet almost as opposed to a real insurance policy. But it's something that can be underwritten.
- [41:15]
Joe Wiesenthal
How valuable is just having a plugin to the grid? You know, I'm thinking about those various deals of companies wanting to buy bitcoin mining operations, for example, and it seems like, you know what, yeah, maybe you can make a little money mining bitcoin, but you have access to 24,7 reliable power. That's a lot more valuable than what's going on inside the shell here. Talk to us just about that value of anyone who has access to power.
- [41:40]
Travis Wofford
So powered land is huge and that is developing. You know, it's existed for a while, but is becoming more and more important because there are REITs and real estate developers who don't need to have the sophistication of can I do the new direct to cooling technology for a powered shell or turnkey solution? I'm just going to have land and I'm going to make sure that there's sufficient power here for you to build your data center or for you to bring your GPUs into. That's attractive if you listen to the earnings calls of several of the real estate developers. They're moving into that if they haven't already.
- [42:20]
Joe Wiesenthal
So their job is they're just going to secure land that they can know, that they know they can get power to.
- [42:25]
Travis Wofford
So they've already got.
- [42:26]
Joe Wiesenthal
They've got.
- [42:26]
Travis Wofford
Right. So the interesting part is they're so, so many different projects over the last several decades where they've been working through interconnection studies for the land for you name it project. And they're waiting years and years just like everybody else in order to get those done. Well, why use it for this when we can use it for that? And data centers, you can make a lot more money on it.
- [42:50]
Tracy Alloway
Isn't the obvious solution to the power problem just for the big guys to build their own power system and maybe spend a little bit more money plugging it into the grid? Again, if political pushback is becoming an issue or if regulators are worried about this, shouldn't they just do it on their own? Is that the straightforward thing to do?
- [43:08]
Travis Wofford
The hyperscalers themselves, I think that goes back to what's the best use of their capital. They're not in the infrastructure business specifically, though I will say, if you look at, I love Amazon as a good example, they sold books, they had the website, they needed to expand, so they build Amazon Web services. They needed distribution, they've got that. Tech companies have been becoming energy companies for years. Energy companies, we know, had to become tech companies a decade ago in order to just keep up. But now there's this integration that's happening from both sides, both in terms of what's happening in their operations, but the.
- [43:47]
Joe Wiesenthal
Ownership itself just going back to powered land for a second. So what you're saying is that there are these developments that have been going on a long time, but they initially planned for something else. But that today, in 2025, as they're getting closer to when they could be connected, maybe AI is. You know what, this connection is a lot more valuable for an AI data center.
- [44:08]
Travis Wofford
Absolutely.
- [44:08]
Joe Wiesenthal
So this is interesting because this to me, like the only reason I go back to this is because one of the things that when people talk about an AI bubble, if there is one, is this idea of crowding out other productive uses of the economy. Right. Are there better things in the long term that we could have done with these turbines? Are there better things that we could have done with these electrical connection systems, et cetera? And other companies might have been waiting on some piece of gear and the AI data center outbid them. And I'm not asking you is this sustainable? But there are other things that are going to lose out or not have access to electricity that people wanted to do but aren't going to, because that wire is more valuable for an AI company.
- [44:48]
Travis Wofford
100%. Think about the actual interconnection queue. Two and a half years ago, before AI became a big deal, there was, I want to say, 2600 gigawatts in the interconnection queue. And we were expecting 80% of that would never actually be constructed, only 20% of it would. And that's pretty typical even on a going forward basis. What are you going to do with those projects and with that land that has already started in a process of interconnection studies and the like? Well, you can shift that to data centers, especially because a lot of that you were producing solar batteries, wind and other power gen now you add on the data center layer to it. And what may not have been economic.
- [45:34]
Tracy Alloway
Before now is, should I build a data center, Joe? Yeah, I've got a grid connection.
- [45:39]
Joe Wiesenthal
I've got water.
- [45:41]
Tracy Alloway
Yeah, there we go. Okay, next project, Odd Lots builds a data center in protected land in Connecticut. Probably not, actually.
- [45:51]
Joe Wiesenthal
So this sort of piggybacks on a question that Tracy asked already. But why not? Just for, you know, as these companies, particularly the hyperscalers that look out in the environment, and there's all these people showing up at meetings, complaining about the water, et cetera, like that. Why isn't the future just entirely behind the meter in Texas, where it's like, we're just going to build it all. We're going to have the natural gas plant on site. We're never going to bother with the grid. We're never going to. We're just going to have the plant right there. Why isn't that just the entire future of data centers?
- [46:22]
Travis Wofford
One of the issues with behind the Meter is what if the data center goes away? So, for example, what if Mark Zuckerberg one day decides, I'm not doing the Metaverse anymore, And somebody in AI says, I'm not doing AI anymore, or we move from GPUs to quantum computing or something like that. You want to have that generative capacity interconnected with the grid so that you don't have a stranded asset.
- [46:50]
Joe Wiesenthal
Okay.
- [46:50]
Tracy Alloway
Oh, yeah. Stranded assets. There's a word I haven't heard.
- [46:53]
Joe Wiesenthal
Yeah, I know. So just looking forward, and I mentioned earlier, Coreweave saying, okay, there is a delay in some of its buildout. What are the big choke points? And do you expect them to stack up? We recently did an episode with Travis Kavula at nrg, and he was like, I don't know, like, the amount of. Just the sheer amount that we're adding to the grid, like, it's going to be tough. And I don't know how it's all going to pan out for some of these projects, but what do you see as the sort of big bottlenecks or choke points that you're thinking about in the coming years?
- [47:24]
Travis Wofford
So power continues to be the number one bottleneck. I don't think anybody would dispute that. Water, obviously, is an issue as well. Getting the turbines and getting what you actually need in order to produce power is very difficult. I do think, though, that when you look at how some of these interconnection requests are prepared, you have five or 10 different people making applications for the exact same project. So it inflates what the expectations are on the number of projects in the market at a given time. When you get rid of all of that extra wash, you wind up with hyperscalers, large enterprises and other real investment grade or serious tenants give you projects that can get done. That's infrastructure. That's infrastructure are great. And a lot of the speculative assets, those are PowerPoints, they probably are not going to get made, particularly if there's any kind of economic shock later.
- [48:24]
Joe Wiesenthal
Travis Wofford, thank you so much for coming on Oddlust. That was great.
- [48:27]
Advertiser/Promoter
Thank you.
- [48:28]
Tracy Alloway
Thank you so much.
- [48:29]
Travis Wofford
Appreciate it.
- [48:42]
Joe Wiesenthal
Tracy. I thought that was really helpful, really clarified a lot of things for me. I'm trying to think like the point about the sequencing of the financing I thought was really interesting or very important to help me understand these things because in my mind I'm like, wow, they're gonna like lose so much money, they're breaking ground on all these deals and then what if they don't actually get implemented because you're waiting forever. And so hearing him describe the sequencing of different financing at different stages, like, all right, well, at least that makes sense to me.
- [49:09]
Tracy Alloway
Yes. I still feel like there's kind of a mismatch issue. Well, it just feels like, you know, you're talking about a, a technology that has like its own upgrade risk, let's say, like, you know, people are developing new chips pretty fast and you don't know when the next one is coming down the line and when you might want to replace all your chips with something else. So that's one thing. Yeah, tenancy, rollover risk. I know he pushed back a little bit on the diversified point, but again, my understanding is for a lot of the ABS structures, maybe CMBS as well, diversification is part of the proposal. And I think he mentioned it earlier and that seems difficult to me to accurately measure if you have a bunch of tenants all, you know, doing something in the cloud, drawing something from a data center, if there's a big macroeconomic downturn or something like, who's to say that they're not all gonna reneg on their lease at once?
- [50:04]
Joe Wiesenthal
The levels of uncertainty just seem so extreme because you're talking about, okay, there's the economic downturn, there's the fact that maybe a lot of this AI stuff could completely fizzle out and doesn't produce a return even in normal times. Then there's the technological questions, then there's the operational questions about are you actually good at operating and building a data center? And not everyone is going to be the same and Then there's the grid interconnection and all of these things about like, reliability of power, et cetera. So it feels like, yes, on the one hand, I'd very much buy that on paper. Yes. You know, this is the 2025 iteration of what used to be cell towers or what used to be rooftop solar or anything else, but with just an. I mean, he mentioned with the cell tower, for example, you have one guy whose job is to mow the lawn, Right.
- [50:55]
That's like, that's the sort of.
- [50:56]
Tracy Alloway
It's just going round and round.
- [50:57]
Joe Wiesenthal
That's like the main, like operational compl component. I get the, you know, most, most of the time the tower is just there. Right. And you have to make sure that it's in a safe area, et cetera. But the degree of complexity, of operational complexity, of technological energy complexity for these just seems like exponentially higher.
- [51:15]
Tracy Alloway
Yeah. And I keep thinking back to just the sheer scale of it and like the numbers that get thrown around literally trillions of dollars in the next few years. Well, I'm sure we'll do more episodes on it.
- [51:26]
Joe Wiesenthal
There are so many sub episodes we could do, including how the best of The Texas is 98 water districts and how you find which.
- [51:34]
Tracy Alloway
Joe, you know what sub episode we could do? What sub C cables we got to do?
- [51:38]
Joe Wiesenthal
We didn't get into that, but we should do.
- [51:40]
Tracy Alloway
That was a pun.
- [51:41]
Joe Wiesenthal
That was a pun. That was a pun. Yeah. Well, we should do more subsea cables.
- [51:44]
Tracy Alloway
Yeah, we should.
- [51:45]
Joe Wiesenthal
And actually, just in terms of data center siting, like access to, you know, latency risk and where it needs to be, et cetera, is something we should talk about more.
- [51:55]
Tracy Alloway
Shall we leave it there for now?
- [51:56]
Joe Wiesenthal
Let's leave it there.
- [51:56]
Tracy Alloway
This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.
- [52:01]
Joe Wiesenthal
And I'm Jill Weisenthal. You can follow me at the Stalwart. Follow our producers, Carmen Rodriguez at CarmenArman, Dashiell Bennett at Dashbot and Kale Brooks at Kale Brooks. For more Odd Lots content, go to bloomberg.comoddlots for the daily newsletter and all of our episodes and you can chat about all these topics 247 in our discord discord gg/oddlines.
- [52:22]
Tracy Alloway
And if you enjoyed this conversation, if you want us to do a sub episode on Sub C Cables, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg Channel on Apple Podcasts and follow the instructions there.
- [52:42]
Joe Wiesenthal
Thanks for listening, Sam.
- [53:14]
Tracy Alloway
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Joe Wiesenthal
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