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TOKYO, May 24 (LPC) – Lenders and insurers in Japan are showing strong interest in financing data centres to support the growing demand for artificial intelligence computing that is expected to attract ¥2trn (US$12.76bn) of investments in the next few years.

Investment in the new construction and expansion of data centres by domestic business operators is expected to increase by 1.55 times to over ¥500bn in 2024 compared to 2023, according to IDC Japan. The research firm predicts investment will continue to exceed ¥500bn every year from 2024 to 2027 on the back of demand for the expansion of hyperscale data centres in the suburbs of Tokyo and Osaka.

While top-tier domestic and international banks are currently the main financiers for data centres in Japan, others such as Japanese regional banks and insurers are eyeing these more lucrative opportunities that also present attractive credit propositions.

“It is anticipated that the finance market for data centres will continue to grow as long as there are hundreds of billions of yen of investment in hyperscale data centres for cloud and AI computing in Japan,” said Hiroyuki Nadachi, head of group 3 (infrastructure, digital) at Sumitomo Mitsui Banking Corp’s global structured finance team.

Speaking at a seminar jointly organised by the Japan Syndication and Loan-trading Association and LSEG (which owns LPC and IFR) on May 15, Nadachi said that some of the global data centre developers are very active and are developing lots of projects around the world concurrently.

“It means that they prefer applying the same finance terms and conditions to all the projects, regardless of the country or region, as long as they could secure similar leasing contracts from global hyperscalers,” he said. "It is one of the unique aspects of data centre financing.”

Hyperscale data centre projects are usually funded through project financings worth hundreds of millions of dollars. In March, Singapore’s Keppel signed a memorandum of understanding with Japan’s Mitsui Fudosan to jointly develop data centres in Japan and South-East Asia.

The same month, Australia’s Lendlease completed construction of the first phase of a 96MW data centre located in Saitama prefecture, north of Tokyo. OCBC Bank, SMBC and United Overseas Bank were the mandated lead arrangers of a ¥27.2bn seven-year borrowing completed in July 2022 that backs the project, according to LPC data.

Late last year, AirTrunk, another Australia-based operator, was planning to finance the new development of a data centre in Japan with an incremental sustainability-linked loan marking its third such borrowing of the year. The incremental portion will fund the expansion of the AirTrunk OSK1 data centre located in west Osaka.

In March last year, AirTrunk raised a yen-denominated SLL of around A$650m (US$413m) for the expansion of its data centre in Chiba prefecture near Tokyo, Japan’s first such financing for the sector. Credit Agricole CIB, Deutsche Bank and MUFG were joint sustainability structuring agents.

Allure of structured finance

In the search for higher yields, Japanese lenders are ramping up in structured finance as they continue to face challenges in improving their profitability despite the end of the negative interest rate environment in March.

“The stock market counts on recovery in banks’ profitability as interest rates rise, but this is harder than you expect,” said Futoshi Mori, chairman of JSLA at the seminar. “As a result, loan margins are not widening despite the rising benchmark. As for what to do then, many financial institutions are thinking that they need to expand their lending to new areas.”

Last month, Nara prefecture-based Nanto Bank established a new office dedicated to structured finance lending within its corporate solutions department, while Shimane prefecture-based San-in Godo Bank set up a specialised finance office in Tokyo within its corporate business department in January.

Japanese regional banks have been active in PF for renewable energy, but it has lost the original appeal as the market matures and pricing tightens. According to SMBC’s Nadachi, data centres hold appeal for project financiers given that their revenues are typically secured by long-term leasing contracts and are considered stable assets compared with power or renewable energy credits.

Data centre financings do pose challenges to some lenders that lack the necessary expertise and manpower, or struggle to determine how to process a risk that has both real estate and PF characteristics.

“One of the biggest challenges for lenders in the data centre sector is its unpredictable supply/demand balance in the future,” said Nadachi. “While there are lots of active data centres that have been in operation for 20+ years, no one can predict if the current leasing contract will be renewed in the future.”

((Wakako Sato: +813 6441 1876, wakako.sato@lseg.com, Twitter: @LPCLoans))

(Editing by Prakash Chakravarti)