Stephan Diaz Ellinghaus, a Specialist in Structured Products on DoubleLine’s Asset-Backed Securities (ABS)/Infrastructure team, discusses (0:00) his outlook for ABS backed by data centers. The supply of data centers, Mr. Diaz Ellinghaus tells DoubleLine Client Portfolio Manager Phil Gioia, CFA, is being outstripped by demand for digital storage, processing and transmission capacity to drive traditional applications such as e-mail, messaging, data mining and streaming as well new developments such artificial intelligence and machine learning. He sees an attractive opportunity set in in terms of all-in yields and yield spreads for data center ABS across the capital structure. This conversation was recorded Dec. 11, 2024.
Topics include:
(1:02) Data centers defined in terms of: storage, processing and transmission functions; requirements, including notably connectivity, cooling technology and “lots and lots of electrical power”; and “tenants,” the users and providers of data- and processing-intensive applications.
(3:15) Growth trajectory for ABS funding of data centers within the context of the overall ABS sector. Year to date, new ABS issuance has totaled $330 billion across approximately 600 deals, up from $280 billion across fewer than 500 issues in 2023. Already in 2024, data centers were collateralized into $9 billion in ABS transactions, equal to the $9 billion in new issuance in the mature subsector of student loan ABS and nearly half of the $20 billion in credit card ABS issuance.
(5:27) Data center ABS deal structures; all-in yields and yield spreads available within the capital structure, with Class A tranches originated at A credit ratings, Class B at BBB and from time to time Class C at BB.
(7:03) Structural undersupply of data centers. This is due to “insatiable” demand that has “doubled in the last couple of years expected to double again by 2030.” Meanwhile supply is constrained by challenges to meeting data centers’ required electricity generation and grid connectivity and very large buildings to house them.
(8:18) Immense data processing necessary to run AI applications, which dwarfs that of older technologies such as search engines. “That's a tremendous addition to data demand, which then translates into data center demand.”
(10:21) Opportunities in data center ABS from the perspective of active portfolio management, DoubleLine’s investment focus being on “stabilized data centers” that by definition are “installed, hooked up, and they have tenants, using them, paying rent.”
