New SEC staff guidance issued in July confirms looser securitization rules for data-center debt, attorneys tell CNBC, and the exemption could cover Nvidia's $500 billion financing initiative with private credit firms announced last week. The guidance lets sponsors avoid Dodd-Frank risk-retention rules, lawyers said, and could spur more data-center securitization deals.
SEC guidance underpins the buildout
Nvidia entered $500 billion in partially backstopped agreements last week with private equity firms, including KKR and Apollo, to support what the companies call a new asset class for computing power. Recent SEC guidance underpins this debt-fueled data-center buildout for artificial intelligence, legal specialists told CNBC.
While data-center securitizations have existed for years, the Nvidia announcement takes the practice to a new level, and the SEC has laid the groundwork to support the rampup. According to CNBC: "Folks contemplating this transaction will be quite happy about the response from the SEC", Orion Mountainspring, a securitization attorney with Orrick, said.
Last month, the SEC agreed with law firm Latham & Watkins that some data-center debt would be exempt from securitization rules that require investment sponsors to shoulder some of the risk of their investments. Mountainspring said the change gives sponsors the opportunity over time to push down the required equity in the deal.
Flexible, capital-efficient structures
B.K. Lee, an asset-backed security attorney at Alston & Bird, said the guidance could result in data-center financing that is more flexible and capital-efficient. It reduces the structured, rigid, prescribed ways of risk retention, he said.
Heads of the data-center group at law firm Katten Muchin Rosenman said the latest SEC guidance gets around Dodd-Frank regulations put in place after the 2008 financial crisis, which was ignited by securitizations of poorly underwritten residential mortgages. Latham had asked the SEC to confirm that data-center securitizations aren't asset-backed securities and therefore aren't subject to Dodd-Frank's risk-retention rules, and Seth Messner with Katten said the SEC basically agreed.
It isn't clear whether Nvidia's agreements with KKR, Apollo and other financial firms are designed specifically for securitization or other types of credit facilities, but Messner said the SEC's guidance sounds applicable to that situation.
A staff opinion, not new rulemaking
The SEC guidance is only a staff opinion, not new rule-making or legislation. Even so, attorneys say it will incentivize more data-center financing by removing restrictions tied to a specific definition of asset-backed securities known as Exchange Act ABS.
Lee said the guidance motivates the industry to create innovative ways to securitize data-center revenues without those strict restrictions, and that sponsors and their financial advisers should be more creative in structuring deals as a result. He added that more data-center securitizations will likely follow the legal pattern set out between the SEC and Latham now that written guidance exists.
Data-center securitizations can avoid risk-retention rules, in the view of the SEC and Latham, because they aren't considered "self-liquidating assets," unlike mortgages. The SEC and multiple ratings agencies declined to comment.
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