SEC Exempts Data-Center Bonds From Key Securitization Rules
The Securities and Exchange Commission has made it easier for data center owners to sell asset-backed securities, potentially opening the door for more debt sales as tech firms scour Wall Street for ways to pay for artificial intelligence.
The SEC said a major subset of data-center securitizations don’t need to have disclosures and investor protections that similar deals require. That includes risk retention, a requirement that companies issuing asset-backed securities retain some of the debt to better align their interests with investors.
In a letter late last month, staff wrote that data centers aren’t financial assets that liquidate over time, like loans or leases, and therefore bonds tied to them aren’t subject to the same rules as debt backed by car loans or home mortgages. The letter was written in response to a query from Latham & Watkins, a law firm that advocated for clarification of the rules.
The requirements that the SEC’s staff said don’t apply were generally created after the 2008 global financial crisis to protect investors from excesses in securitization markets that ultimately brought about the near collapse of the banking system.
Those rules don’t make sense for all types of deals and compliance with them has proven costly and unnecessary, even keeping some firms from entering the market, according to lawyers at Latham. For example, data center operators that issue ABS already retain a substantial amount of risk in the deals, and if they didn’t they wouldn’t be able to achieve strong credit ratings, according to Kevin Fingeret, a partner at Latham.
