(Bloomberg) – When Meta Platforms Inc. looked at lenders to secure $26 billion in debt funding for the construction of a vast new data center, one important detail made a big difference in promoting a fierce war of bidding for the deal.
Funding is being carried out through complex arrangements that free up balance sheets to curb Meta's book debt and pursue an aggressive push to artificial intelligence. The joint venture actually builds and owns a 4 million square foot Hyperion facility, and Meta will occupy and use the data center in a 20-year lease.
However, the social media company also offered sweeteners. If you choose to terminate your lease early or not renew it, and the data center value falls below a pre-determined threshold, the company will refund the investors a refund for potential losses.
Such contracts, known as residual value guarantees, are intended to protect investors when there is value for the underlying asset. But the use of this provision in such large data centers sets new precedents, according to people. Given the way AI infrastructure takes years and how innovation can quickly remove data centers, Meta has provided backstops to encourage investors to lay out tens of millions of dollars.
“The specific nature and high costs of building these data centers are unprecedented,” says TeddyCaplan, who has implemented New Mountain Capital's net lease real estate strategy and is not involved in meta transactions. “We have seen very advanced technological changes that will make these facilities less or less available to future users.”
Meta chose Pacific Investment Management Co., leading $26 billion in debt funds after a month-long competition that included some of the largest asset managers overseen by Morgan Stanley. Blue Owl Capital Inc. is donating $3 billion in capital to its joint venture.
Representatives from Meta, Pimco, Blue Owl and Morgan Stanley declined to comment.
Despite the potential for profitable returns by funding the AI models and the infrastructure needed to run them, the risk involved means that even the most enthusiastic lenders are demanding special protection.
As tech companies raise huge amounts of money, they need to fund AI Arms Race. JPMorganChase & Co. and Mitsubishi UFJ Financial Group Inc. are currently leading a debt package of approximately $38 billion to make payments for data centers connected to Oracle Corp. Meta arrangements can be useful as templates.
Bloomberg News is expected to receive a grade-of-investment characterization, previously reported by Bloomberg News, including 24-year tenors, including the bonds. Pimco is expected to work with Morgan Stanley to distribute the debt chunks to other investors in the coming weeks.
Meta pays rent to data centers based on the electricity costs used, people said. That annual cash flow will fund interest expenses on bonds in turn.
Meta guarantees do not apply to future interest payments and, according to one of the people, it is different from the guarantee that the holding company is normally provided to the obligations issued by the subsidiary. However, if the value of your data center drops significantly, it provides some protection to investors.
The planned Hyperion complex is part of a wave of new data center structures launched into AI, which will recharge the sector and require significant funding. JPMorgan estimates that there will be a permanent funding needs of approximately $150 billion related to data centers in 2026 and 2027, according to an August report.
Before AI, data center funding was “really a different game,” says Eamon Nolan, a project finance lawyer at Vinson & Elkins who are not involved in meta transactions. “We didn't have these $30 billion campuses,” he said. “They were 20 megawatts here, 20 megawatts there. You weren't facing this huge capital-intensive structure.”
– Support from Natalie Wong and Riley Griffin.
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