Are banks recognising the true value of the digital economy infrastructure?

by Daryl Seaton, CFO, VIRTUS Data Centres

Data centres provide the infrastructure and building blocks upon which the digital economy is based. If our digital economy is to continue to thrive and grow as anticipated, as a sector, we need to ensure that we continue to provide the required space, security, power and connectivity for this to happen. Accordingly we need to be able to raise capital to build and develop the facilities. As one of the founders of VIRTUS Data Centres, one of my primary roles since the business started has been focussed on exactly that in this hugely capital-intensive sector.

Looking at this objectively, while the understanding of what we do is now more widely accepted within lending institutions, there is a huge chasm between those who say they want to lend to our industry and those who actually do lend, on commercial terms. The strong macro sector backdrop, heavy assets backing, recurring revenue and sticky customer base are very attractive features to a loan – however this is an asset class which many banks don’t deal with consistently – partly because they may only come across them every couple of years, if at all. Some see data centres as an esoteric part of real estate, some address them in the corporate TMT space, and others in their ‘special situations’ desks which act as a catch-all for non-mainstream assets.

As a business, VIRTUS has a new portfolio of efficient data centres, populated with customers, many of whom are the bedrock of the cloud services industry. It is perhaps no surprise that one of the key features of the appeal of the cloud is the flexibility it offers to customers, and in some cases it is precisely this flexibility that makes lenders nervous – particularly if they are looking at the weighted average agreement length which has been decreasing over time across the industry.

So how can “enlightened bankers” i.e. those who both have appetite to lend and understand the drivers of the data centre industry, get their internal colleagues such as their credit committees and heads of lending on board with a large loan for a non-standard lend? And how do banks choose which data centre operators to back from a myriad of companies that from the outside may look just like VIRTUS?

At an early stage, it may not be clear which providers will be winners – the sector is growing but not all providers are gaining their share of new business. Banks need to have someone who a) shares the vision of where the business is heading, and b) has the depth of knowledge and understanding to dig below the surface information.

a) Where is the business heading: All too often banks revert to their standard questions such as, are you a mature business that has a cash flow that can support the lend? When the question they should be asking is - if all goes wrong, will I lose my money? If they really knew where the industry was going, and they have lent and taken security against the right sites, they have pretty good security. If a data centre business can’t pay the interest, it’s far more likely the data centre will be bought than sold for a sum of the parts – the maths on the latter doesn’t work.

Another example of a standard question to ascertain where the business can go would be – what is the length of your average contracted agreement? In 2012, the answer may have been eight years (with a five-year loan). Today it may be less than the term of the loan, so whilst I can understand the concern, banks need to recognise that we are currently going through the most transformative change in the last 50 – 100 years. iPhones didn’t exist ten years ago, and Uber is even younger and wouldn’t exist without data centres and the supporting technology. These businesses are here to stay, and these are the types of businesses we work with. If you want to lend into this market, you need to appreciate these trends, but many mainstream lenders continue to be behind the curve for all but the most mature, multi-billion pound operators.

b) Depth of knowledge: We have worked extremely hard to build a club of supportive stakeholders who understand and believe in the wider data centre story – and it has served us well. The challenge continues to be to increase the data centre industry knowledge in financial institutions and deepen the pool of willing lenders.

Not all data centres are created equal. We can all say we have a good management team, critical mass and a revenue stream, but it’s often the next level of questions that are really the most important – eg who are your customers, and what are those customers doing in your data centre ? What is the density you can deliver in your data centre? Where are the data centres located ? VIRTUS Data Centres are strategically located in optimised London locations, and customers include the hyperscale cloud providers, Fintech and a broad range of Enterprise organisations. Our data centres provide these customers with award winning innovation, ensuring maximum efficiency, ultra-high density and highly interconnected facilities.

This kind of understanding is the difference between someone who can make the leap to make the lend. If bankers try to constrain the loan by reference to typical covenant ratios, they aren’t going to be lending in this sector.

The challenge is for lenders to make the connection between the drivers of the digital economy and the appetite to the lend to the businesses that are the building blocks. What could be perceived as high risk, may in fact be lower risk than they appreciate. Data centres are here to stay; -it is in our collective interest to educate more lenders so they are less nervous about supporting our sector. The more lenders who understand the nuances of the data centre business today, the better for all of us. If you take away one thing from this blog, and you are interested in lending into this sector, I urge you to come (enlightened and unenlightened alike) to a VIRTUS Data Centre so we can show you what we do and help you to pick the right winners, ask the right questions and recognise the right answers.