- Delays are piling up. S&P Global counts 146 delayed or canceled data center projects, with three-quarters of them explicitly tied to local opposition, the Financial Times’ Alphaville reports.
- The backlash is spreading. Statewide moratoriums have been imposed in places like Texas and New York, local government bans have been enacted across 40 states, and over half of state legislatures have legislation or pending legislation tackling data center issues, according to S&P.
- Termination rights are the key risk. Most projects carry penalties such as rent credits and tenant termination rights for milestone delays, which “could substantially deteriorate credit if exercised,” S&P said, and a triggered termination could cause significant credit stress or even a default.
- Short delays are manageable. Most standalone data center construction projects have a debt service reserve buffer for setbacks of three to six months, and PGIM’s Edwin Wilches said a three-month delay is “within reason,” but losing governmental approval or electricity “is a much bigger deal.”
What Happened?
Data center construction has helped power the US economy, but, as Oracle has found, finishing a data center is very different from starting one. The largest planned projects, some the size of Manhattan, are still on the drawing board or under construction, and community concerns over energy costs, grid strain, water scarcity and pollution are growing. S&P’s Chris Mooney said a developer facing a termination would need to find a replacement tenant on similar terms, possibly with a costly redesign, and “in many cases, the project may not have sufficient liquidity to absorb such circumstances.”
Why It Matters?
For credit investors, the upside is limited to timely repayment, so execution risk is front and center. Contract terms vary widely: penalties kick in at different times, and S&P found “no standard definition” of force majeure in data center deal documents, so the same delay could hit creditors very differently across projects. That complexity is one reason data center debt has offered a complexity risk premium. Pimco’s Lotfi Karoui warned the biggest risk is that today’s compute shortage flips into a glut, with more supply than demand four years from now.
What’s Next?
Capacity that is under construction and fully permitted is typically out of reach of moratoriums, and with compute still scarce, a departing tenant can probably be replaced for now. Investors will watch for more state and local restrictions, how individual deal documents handle delays, and whether projects without guarantees from fortress-balance-sheet hyperscalers start to see wider spreads.
Affected Tickers and Coins: ORCL, CRWV, SPGI, PRU
Source: Financial Times
