Financing data centre growth
08-05-2012 - John Hatcher
With businesses and consumers alike using their broadband connections more than ever before – for email, IT outsourcing and cloud services, as well as video, music and photos – there is increasing pressure on data centre providers to meet demand for additional capacity, as and when it is needed. This need is further compounded by the growth in remote working and the ever increasing use of rich applications over mobile broadband. Taking advantage of the opportunity represented by that demand is largely reliant on a data centre operator’s ability to rapidly fund and provision capacity. Staying just ahead of the demand curve is vital in a highly competitive environment.
A significant part of the expansion is being driven by large enterprises and it isn’t simply a matter of providing the additional data real estate. These organisations typically want their data to be stored in an ultra-secure and reliable facility, they want guarantees about data recovery and back-up and they will likely require a range of bespoke applications and services. As a result, data centre providers are constantly making regular, as well as one-off investments in their facilities. While there is no one specific lending formula that will suit all providers and guarantee success, upfront commitments and secured contracts are very important both to big players and smaller niche providers since these are generally a primary lending criteria used by financial institutions to assess future revenue streams and expected cash flow.
The more established, larger data centre providers will normally have access to a number of different financial instruments in addition to bank debts. For long term funding, many secure interest-only bonds with seven to ten year fixed term contracts. The data centre then pays interest throughout the life of the bond, repaying the full amount at the end of the contract.
These providers also then tend to have supporting bank debt in the form of revolving credit facilities, enabling them to draw on larger amounts of money when needed on a more flexible basis. The terms of these agreements are normally somewhere between three and five years. Once the facility is in place, the data centre provider can then quickly access the finance necessary for large capex investments, in the support of building out additional facilities, without having to worry about the potential delay involved with negotiating new institutional funding.
In the current, rapidly developing environment, smaller players would be wise to also investigate their options for raising additional equity – that additional security, coupled with the guarantee provided by long term contracts make the data centre operator a safer and more attractive investment, and can serve as an accelerator for debt finance.
Another important consideration for data centre providers is which bank, or banks, to partner with. Depending on the size of the deal, there may be one or more parties involved. For example, financing up to £15m would typically be supported by a single institution, whereas for a debt quantum over £20 to £30 million more than one bank would normally be required. Whatever the amount, what’s important is to ensure that the financing partners you choose understand the market. This is especially important given the relative youth of the industry and therefore the lack of normalised lending guidelines and criteria.
As our appetite for broadband connectivity continues to grow both at work and at home, what seems clear is that the data centre sector will continue to develop rapidly over the next few years. Those providers that can respond in a timely fashion to customer demand will be well placed to capitalise on this and rise to the top. Quick access to the necessary funding will be key to this, and all data centres should be preparing by taking time to understand their financing options and building a close relationship with their banks and other financial partners.