The Deal That Shows Where Loan Market Money Is Going
Wall Street banks have a problem. The usual source of big loans - corporate buyouts - has been quiet. So they are looking for something new to fund, and artificial intelligence is handing them an answer.
The first major sign arrived this week. QTS Realty Trust, a data-center operator that Blackstone owns, is asking investors for $3.25 billion through a leveraged loan. Leveraged loans are debt that companies with lower credit ratings issue, and they typically pay higher interest to compensate for the risk.
QTS increased its proposed loan to $3.25 billion and canceled a $1 billion bond sale it had also been working on. The funds will be used to settle outstanding construction loans and other liabilities, along with covering corporate expenses.
This is not QTS's first trip to the debt market. Over the last twelve months, the firm obtained more than $6 billion through investment-grade debt offerings, in both public and private markets, and additionally sold asset-backed securities tied to data-center revenue. Moody's Ratings gave the new loan a Baa3 rating, the lowest rung of investment grade.
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Why Borrowers Are Sweetening the Pot
The loan is not just big. It is also expensive. QTS is offering investors 2.25 percentage points of extra interest above the US benchmark. For reference, bonds with comparable credit ratings typically offer 94 basis points above U.S. Treasuries, based on Bloomberg data.
That gap is a signal. Loan investors tend to be picky, and they want a reason to buy a new deal when most of the market is busy refinancing old loans. David Rosenberg, who heads Oaktree Capital Management's liquid credit unit, said: "When you have CLOs soaking up paper that's mostly for refinancing, this is a source of new deals. And on the face of it, that is of value."
CLOs are collateralized loan obligations - bundles of loans sold to institutional investors. The QTS loan also has a big name backing it up. Microsoft is a tenant in the operational data centers that secure the loan, sources with knowledge of the deal said.
That reliable cash flow makes lenders more comfortable. Rosenberg said the key is "something that drives the cash flow stream," and a contract with Microsoft qualifies.
More AI Infrastructure Loans Are Coming
This is not a one-off. In May, cloud-computing company CoreWeave sold a $3.1 billion loan. Now Bitcoin miner TeraWulf is considering issuing its first-ever leveraged loan.
John Yovanovic, the leveraged finance co-head at MetLife Investment Management, said: "We're still in the early innings of the AI buildout, and seeing signs issuers may be diversifying funding sources. We have room, investment grade has absorbed a lot year-to-date." Nick Losey, who manages portfolios at Barrow Hanley Global Investors, put it even more directly: "I'd be shocked if we don't see more."
Globally, companies including Amazon and SpaceX have raised more than $335 billion this year, mostly in bonds, according to Bloomberg-compiled data. The loan market is catching up.
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