DoubleLine Sees Compelling Case to Buy Asset-Backed Securities Tied to Data Centers

(Bloomberg) -- It’s a good time to buy asset-backed securities tied to data centers, according to a October research note from DoubleLine Capital LP, as demand for digital infrastructure is booming and supply is constrained by energy requirements.

The investment manager said there are compelling reasons to invest in data center securitizations across the capital stack: senior tranches offer stable cash flows and junior tranches have the best risk-adjusted returns, according to the report. The collateral for those securities are data centers with medium- and long-term leased and high-quality tenants. 

DoubleLine’s endorsement comes as billions of dollars are flowing into the sector to capitalize on the potential fruits of the artificial intelligence boom. Blackstone Inc. is one of the players that has poured tens of billions into the assets. Last month, the investment firm agreed to acquire Australian data center-operator AirTrunk in a deal valuing the firm at A$24 billion ($16.1 billion). 

The asset-backed securities market remains a small portion of data center investment, making up roughly 5%, according to research from Morgan Stanley. But that is changing, according to DoubleLine analysts, who said investments in digital infrastructure are shifting from venture capital and a company’s retained earnings into credit markets broadly.

Though DoubleLine has done private transactions to build exposure, broad ABS sales had been limited until 2021, said Andrew Hsu, a portfolio manager of DoubleLine fund BILDX, which has about $384 million in assets, according to data compiled by Bloomberg. Sales have picked up since then, he said, adding it “definitely feels like in 2024, it has been stronger than any year in the past.”

More than $7 billion of ABS tied to data centers has been sold this year, according to data compiled by Bloomberg, compared to $5.3 billion this time last year. 

Still, overstated demand is a risk that bears watching, the investment firm said in its report, as is the risk that the “industry could be overbuilding capacity.” But DoubleLine thinks data center infrastructure is set to grow and doesn’t expect over-saturation in the near- to medium-term given bottlenecks to transmission and power. CenterPoint Energy Inc., a power grid operator in Texas, has seen a 700% increase in requests from data center developers to connect to the utility over the last few months. 

“As everything becomes more digital, the need for data center technology, the need for data center services has just grown exponentially over the last several years,” Hsu said.

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