Wellington Management is reportedly steering clear of data center debt deals, citing anxieties over property valuations. This move comes as the data center industry faces growing financial distress, characterized by rising costs, revenue shortfalls, project delays, and labor shortages. A recent survey by AlixPartners highlighted that 68% of over 400 respondents expect an increase in distressed situations within the next 12 to 18 months, an uptick from 66% in 2025.
The broader market for data center debt is showing signs of weakness. For instance, Prime, a data-center operator, recently paused a planned bond sale for a proposed €1 billion ($1.07 billion) bond, indicating investor reluctance. This trend suggests that current data center securities are being sold at wider spreads than previously, reflecting a more cautious investment environment despite strong investor demand for AI exposure.
Several factors contribute to the industry's woes, including increasing community resistance to new data center developments across the US. This local backlash, combined with tightening capital markets, is creating a challenging environment for operators. Some analysts describe the current situation in private credit and data center wrappers as reminiscent of the 2008 financial crisis, highlighting the potential for significant market instability. Furthermore, large tech companies like Meta and Alphabet are utilizing complex accounting devices, such as variable interest entities (VIEs), to finance multi-billion dollar data center projects, keeping substantial debt off their balance sheets, which raises concerns about transparency and true financial leverage for investors. Oracle Corp., for example, has $260 billion in future lease commitments, mostly for data centers, which could eventually impact its balance sheet, leading to a recent credit downgrade by S&P Global due to "stretched leverage."
