Data Centers Getting Easier to Finance, Harder to Build

What the right hand giveth, the left hand taketh away. We think someone said that once. Regardless, data center operators might be feeling that sentiment right now, because they are getting contrasting signals about their businesses from two different levels of government.

Let’s start with the giveth. Earlier this month, SEC staff told law firm Latham & Watkins that a large chunk of the data center securitization market falls outside the Commission’s rules on asset-backed securities. The upshot is that 2008-era protections Congress and the SEC built for pools of car loans and mortgages—chiefly risk retention, disclosure, and diligence obligations—do not apply to bonds backed by data servers.

That will help support the torrid rate of data center investment. Data center ABS issuance grew from $2.4 billion in 2020 to $15.5 billion last year. Wall Street has been straining to keep up with the sector’s appetite. It took six firms, including BlackRock and Goldman Sachs, to assemble a $500 billion financing package for Nvidia this month. Anything that makes these securities easier to issue is going to be welcome.

The ‘taketh away’ side of the equation is playing out at the state and local levels. On Aug. 18, Pennsylvania Gov. Josh Shapiro, who had been courting data center projects as recently as last spring, signed an executive order that omits AI data center proposals from the commonwealth’s fast-track permitting program. Anything above 25 megawatts now needs local land-use approval and a community benefits agreement before state environmental regulators will review the permit application. Developers must bring their own power and pay for it, and they can no longer put host communities under NDAs.

Two weeks earlier, Texas Gov. Greg Abbott did something comparable in a state that spent years billing itself as the epicenter of AI development. He directed the Public Utility Commission and ERCOT (the entity that manages the state’s electrical load) to audit every data center in the interconnection queue before any new project gets approved, and to deny grid connections to projects that do not meet the applicable requirements. ERCOT is currently holding roughly 474 gigawatts of connection requests, more than five times the state’s record peak demand.

These politically different states are following a trend in public sentiment that crosses party lines. Heatmap’s polling on whether people would welcome a data center nearby went from a roughly even split last August to 15% in favor and 75% opposed just one year later. More than 500 counties and municipalities have adopted ordinances blocking or restricting these projects, most of them this year. Data Center Watch counted 75 projects worth about $130 billion disrupted by local opposition in the first quarter alone. Politico reported last week that eight states have rolled back their data center tax subsidies.

Judging by their disclosures, public companies are picking up on this resistance. Azio AI Holdings’ Aug. 18 10-Q puts permitting and utility interconnection delays on its list of risks to a planned Texas campus. Amaero’s Aug. 28 S-1 illustrates the issue from a supplier’s perspective. The company, which makes titanium and refractory alloy powders, warns IPO investors that data center demand is expected to raise electricity prices, and that it may not be able to pass the added cost to its customers. Concerns about the effect of data centers on electricity costs are therefore emerging on both sides of the equation: as a public-policy issue and as a potential financial risk for companies.

Taken together, these developments show that easier access to financing does not necessarily translate into easier data center development. For issuers, the practical takeaway is that exposure to the AI infrastructure boom increasingly requires looking beyond capital availability. Permitting delays, grid access, community opposition, electricity costs, environmental strain, and changing state and local requirements can all affect project timelines, operating costs and demand throughout the data center supply chain. Companies with direct or indirect exposure to data center growth should consider whether those risks—and the potential financial effects—are adequately reflected in their disclosures.

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