Big Tech's data center debt 'underestimated,' local opposition poses risk

Big tech companies' financial obligations for their massive data center investments might be significantly underestimated, with off-balance-sheet debt potentially reaching $1 trillion, according to a Financial Times report citing Goldman Sachs analysis. These commitments largely stem from long-term lease agreements for data centers, which are not always fully reflected on corporate balance sheets, creating a potentially misleading picture of their leverage.

One example cited involves Meta, which established a joint venture, Bené, with private equity firm Blue Owl to construct and own data centers. Although Meta holds only a 20% stake in Bené, it has committed to leasing the facilities for at least 20 years. This long-term lease agreement enabled Bené to issue $27 billion in corporate bonds. While Meta's commitment effectively guarantees repayment, the debt is not recorded on Meta's financial statements, a practice described as a "creative way to raise substantial funds while limiting the apparent burden on the balance sheet."

When including commitments for semiconductor, equipment, and power purchases, the total off-balance-sheet financial burden for companies like Alphabet, Microsoft, Meta, Amazon, Nvidia, and Oracle could be even higher. Morgan Stanley estimates these commitments reached $982 billion by the end of the first quarter of this year. This accounting method means that leverage and future liquidity needs might be underestimated as these obligations come due.

Adding another layer of complexity, the construction of these data centers, often predicated on large, long-term commitments, faces increasing hurdles. Growing opposition from local residents in the U.S. is becoming a significant risk factor for lenders. Banks like Bank of America are now incorporating community support and necessary permits into their credit assessments for data center projects. Concerns over noise, environmental impact, increased electricity costs, and substantial water usage have fueled resident protests against data center developments across the U.S., with numerous projects facing community opposition.

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We look at the readiness and creditworthiness of the project. Readiness includes the necessary permits and approvals, as well as community support.