Data centre financings in Spain

A fast-growing asset class, data centres are dynamic and complex systems requiring careful design, management and optimisation to meet the unprecedented growth in demand fueled by new ways of working and modern technologies including artificial intelligence, machine learning requirements and 5G.

In this Data Centre Insights series of articles, we will explore and examine the challenges and opportunities data centres present for the world in terms of technology, real estate, innovation, sustainability and investment.

In the fifth article in our series, we will explore some of the key issues from a lender's perspective when it comes to the financing of data centres.

There is undoubtedly an increased interest in data centre financings as part of the digital infrastructure asset class. Especially since COVID-19 lockdowns accelerated the need for enhanced connectivity and data storage capacity, data centres have been in the spotlight. Given how energy-demanding data centres are, there is another key element for lenders when looking into providing financing in respect of data centres, namely energy transition and sustainability. Spain has not shied away from this need and has become a very relevant EU market in this respect given its size and population, taking advantage of its strategic location. We touch below on some key elements from a lender's perspective in the first of a series of notes on data centre financings in Spain:

Financing structures for development (and in due course refinancing) of data centres and acquisition of data centres

The two main financing structures that tend to be debated when approaching the financing of a data centre are a real estate financing structure vs. a project financing structure:

(a) In the event the financing is approached as a real estate financing transaction the emphasis will be put on the value on the underlying real estate asset and lenders will in all likelihood require a real estate mortgage. This can also lead to increased structuring requirements of lenders, who may want to isolate ownership of the real estate asset from the operation of the asset and create an Opco-Propco structure, which are well tested in Spain.

(b) In the event the approach is a project finance approach, we would be looking at a typical non-recourse/limited recourse structure where the weight is put on the off-take and revenue of the data centre rather than on the value of the underlying fixed assets, and where there is an in depth due diligence on the type of data centre (and each off-taker/agreement), i.e. whether most of its capacity is leased to a hyperscaler or whether there are multiple lessees, with lenders having to be made comfortable with the complexities arising therefrom.

Choosing for one alternative or the other will depend on the nature of the developer and the maturity of the relevant asset, but as per our experience, we understand the project finance approach will be predominant.

1. Financing structures of acquisition. In the event we are analysing the acquisition of one or more data centres the financing is likely to use acquisition finance techniques. If such acquisition is taking place indirectly by means of the acquisition of shares in one or more Spanish companies owning each one or more data centres, other acquisition finance elements come into play, including inter alia financial assistance restrictions, which in Spain leads to restrictions on the available security package and guarantees.
2. Financing structures for refinancing. If we are looking at a refinancing structure, borrowers who have developed a series of data centres may, similarly to the renewable energy space, approach refinancing as a portfolio financing at Holdco level, hence relying on the upstreaming of cash-flows of all assets. In this context, subordination and cross-collateralisation issues need to be analysed closely and whether certain events have an impact at project level or at portfolio level needs to be discussed in detail.

Energy consumption concurs and renewable energy.

It is widely known that data centres give rise to an intense energy demand (both in terms of electricity and water supply for cooking systems). An 8%-14% demand increase is expected for the coming ten years, with AI data centres expected to consume up to ten times more energy than traditional ones. The high electricity demand can give rise to local grid constraints and this has in turn led to restrictions in some cities (and even countries) for the location of data centres. 

Last year the EU already foresaw this and enacted EU Directive 2023/1791 of the European Parliament and Council of 13 September 2023 on energy efficiency, which purported to create an EU-wide database, which would include certain information and impose an obligation on market players to monitor the energy performance of their data centres 

On the back of this, the EU Commission has adopted a new delegated regulation (Commission Delegated Regulation (EU) 2024/1304, dated 6 June 2024, the "Delegated Regulation") on the first phase for establishing a new EU-wide scheme to rate the sustainability of data centres. The Delegated Regulation provides for (i) the information requirements and KPIs that are deemed necessary to set-up an EU scheme; and (ii) the initial data centre sustainability indicators that will have to be calculated on the basis of (i) above, all as more fully set out in Annex I, Annex II and Annex III thereto. This will be relevant for financings as well since on the back of this: 

(a) the EU will establish a database on data centres to ensure homogeneous data being reported and made available to the public;

(b) there will be a reporting calendar according to which the first set of data will be sent by the relevant data centre operators (those with an installed demand of at least 500kW) by 15 September 2024, the second batch by 15 May 2025 and then on a yearly basis thereafter through a national reporting system or, if such system has not been set up timely by direct submission to the EU database; and

(c) the submitted data will form the basis of a report to be submitted to the Council and the European Parliament. Such report might be submitted together with proposals for new legislation in consultation with the relevant stakeholders in order to enhance energy efficiency of data centres to get to minimum performance standards and in order to establish an analysis on the feasibility of implementing a transition to a data centre sector that complies with net zero requirements.

Spain, land of opportunities 

The size and structure of Spain make it an attractive location for data centres. In fact, Madrid is gaining ground against the so-called FLAP (Frankfurt, London, Amsterdam and Paris), which leads the data centre market in Europe. Thanks to its strategic location, Madrid (and the adjacent regions thereto) has managed to position itself as the digital hub of southern Europe, as it acts as a nexus of interconnection. It has also positioned itself as a digital port, as it is the point where numerous submarine cables converge. Moreover, if Madrid were able to capitalize on its strategic position between Europe and Africa and America, through the submarine cables that pass through the Region, it could become one of the great world capitals of connectivity.

The future: AI

Data centres are an asset with great growth potential. Forecasts point to an increase in global data consumption, specially enhanced by AI. This, coupled with Spain's strategic geographic location and the predictability of revenues from large-scale data centres, bodes well for a number of opportunities. 

Specifically in terms of AI, and as more broadly set out in our Insight dated 19 June 2024 (AI – a win for data centres?), AI is cloud trained and requires such amounts of computer power and storage that traditional data centres can't meet it, hence there is a clear expectation that the demand for AI suitable capacity will be growing rapidly.

Additionally, the fact that AI needs to be delivered at a close proximity means that the demand for far edge data centres will grow to reduce latency.

Clearly these elements will all have to be considered by developers and financiers of data centres to take advantage from the huge opportunity the sector as a whole, and more specifically the AI data centres offer.

Authors: Jose Christian Bertram, Partner; Aitor Errasti, Counsel