Rising interest rates and heavy debt loads are a problem for parts of the data center industry
Jeremy Hill
Welcome to Jeremy Hill, a reporter in New York, where I'm digging into the struggles of the data center industry. We also look more closely at First Republic’s takeover and show how New Jersey is emerging as the hot new place to go bankrupt. Follow this link to subscribe. Send us feedback and tips at [email protected] or Tweet/DM to @JeremyHtweets
A Chanos Short Gets Interesting
Rising interest rates and heavy debt loads are casting a financial pall over pockets of the data-center industry, a segment of the commercial real estate sector that powers much of what we do online.
Internap Holding went bankrupt last week after selling off most of its data centers and plans to focus its business on cloud services going forward. Cyxtera Technologies may soon follow in its footsteps if talks with its lenders don’t pan out. And behemoth data center REIT Digital Realty Trust — while nowhere near distressed — has seen its shares fall about 34% over the past 12 months.
It’s something of a coup for famed short seller Jim Chanos, who has been bearish on the sector since at least last year. He’s been about his view that big tech companies will stop renting from industry stalwarts and instead build their own data centers. He recently said on Twitter that Digital Realty’s business model in particular is unsustainable in the face of a rising debt burden.
That thesis has yet to play out, but data centers are expensive to build and maintain, so rising rates and less hospitable equity markets are a problem for their operators. And their fortunes are very much tied to the whims of fast-growing tech giants — hyperscalers, in industry jargon — which are cutting jobs and signaling cooling demand for some computing-heavy services.
For Cyxtera, higher rates and a tepid economy came at precisely the wrong time. The data center operator has a revolver due in November and no clear way to refinance it. The company skipped an interest payment last week and may have to file for Chapter 11 bankruptcy, Bloomberg has reported. Its private equity owners recently shied away from injecting fresh cash in the firm, and its more than $1 billion debt load is weighing on the business.
“Data centers are costly to build and costly to lease — essentially there is a lot of operating leverage in the business,” Neil Mack, a vice president at Moody’s Investors Service who downgraded Cyxtera in February, said in an interview. “There is only so much debt leverage these companies’ business models can support.”
Of course, the distress showing itself now is in relatively small, isolated players, compared to the behemoth REITs that Chanos is targeting. Digital Realty is hardly on the brink, with its bonds changing hands for close to par. But its debt load is heavy — something Moody’s called a “persistent credit negative” in a December note, and that earned the company a downgradeBMO Capital Markets in late March. In the same note, BMO’s Ari Klein said the firm believes several of Digital Realty’s biggest tenants are “troubled.”
A representative for Digital Realty declined to comment. Chanos and a representative for Cyxtera didn't respond to requests for comment.
The Latest on... First Republic
First Republic Bank became the latest lender to collapse into Federal Deposit Insurance Corp. receivership, with JPMorgan Chase & Co. agreeing to buy the bank
JPMorgan is no stranger to the rescue role, Amelia Pollard writes. To Cornell University law professor Saule Omarova, the 2023 crisis has striking parallels to a meltdown more than a century ago, in 1907. Then, one John Pierpont Morgan helped orchestrate the rescue of a number of struggling banks, and his role in stymieing that panic helped to lay the groundwork for the US government to establish the very federal system that’s now designed to prevent and deal with such crises.
“Perhaps Jamie Dimon is correct when he says that this phase of the crisis is now over,” Omarova said. “That’s the bright side. The conundrum is that the federal government doesn’t appear to have a successful solution to systemic instability.”
Bank shares continued to slide on Tuesday, with regional banks PacWest BancorpWestern Alliance Bancorp sinking as much as 35% and 27% respectively, triggering multiple volatility trading halts.
Read more: First Republic’s Jumbo Mortgages Brought On Bank’s Failure
Even before it assumed the failed California bank, JPMorgan already made up 10% of all US bank deposits, which amounted to more than $1.7 trillion in all as of December last year, according to FDIC data
“In the short term it makes a lot of sense from a systemic stability perspective,” said Hilary Allen, a law professor at American University, referring to the acquisition. But JPMorgan was already considered far too big to fail. “And now it’s grown some more.”
High Alert
- Electric truck maker Lordstown Motors may be forced to cease operations and file for bankruptcy after manufacturing giant told the electric-vehicle company that it’s prepared to pull out of a production partnership.
- Hundreds of Credit Suissebondholders sued Switzerland’s banking regulator after their securities valued at about $1.7 billion were wiped out during the lender’s government-brokered takeover by . Law firm Pallas Partners filed the suit in a Swiss court on April 18 and is seeking full compensation for its clients — 90 institutional investors and asset managers with $1.35 billion in AT1 bonds, as well as 700 retail and family office clients accounting for some $300 million.
- Legacy Cares, a nonprofit organization created to build and operate a sprawling 320-acre youth-sports and entertainment complex in Arizona, filed for bankruptcy on Monday after defaulting on $284 million of municipal bonds.
- A Hong Kong judge ordered the liquidation of Chinese developerJiayuan International, nearly eight months after a petition was filed by a bondholder. Jiayuan is the third real estate developer to face court-ordered liquidation in Hong Kong.
- KWG Group securities tumbled Tuesday after the firm became the latest Chinese developer to default, even as new-home sales gain steam nationally. The developer’s dollar bonds slumped as much as 23 cents.
Notes From the Brink
Well-known companies in financial trouble are increasingly seeking bankruptcy protection in New Jersey, upending a decades-old norm of firms filing in neighboring jurisdictions like Manhattan and Delaware, Amelia Pollard and Jonathan Randles report
Bed Bath & BeyondDavid’s Bridal both sought Chapter 11 protection last month in Newark and Trenton, New Jersey, respectively. A former chemical maker that’s affiliated with Berkshire Hathaway filed there last week. And Jersey City-based did the same last year, along with a wave of retailers during the pandemic.
David’s Bridal passed on a repeat trip to Delaware and picked New Jersey for its second Chapter 11 in five years. Jim Marcum, its chief executive officer, said that was a natural choice given its proximity to the retailer’s headquarters in a suburb of Philadelphia, a number of store locations and one of its distribution centers.
“After a lot of consideration, we just like the venue,” Marcum said. “It worked out well.”
New Jersey’s rise as a bankruptcy venue also has something to do with predictability. A spate of judges retired from the popular filing locales of Manhattan and Delaware in recent years, taking their long track records with them. Knowing the judge that will oversee a company’s bankruptcy gives attorneys an edge, and bankruptcy law doesn’t force companies to file in the same state as their headquarters.
“You’re picking a court for the judges,” said Robert Lawless, a law professor at the University of Illinois. “It’s not only knowing which way judges will lean. But also, a level of comfort with how the judge is likely to rule, and how they’re likely to conduct the proceedings.” Lawyers want to ensure that the judge won’t “strike out on a wild new way to approach” a case, he added.
By the Numbers
While First Republic creditors may be waiting to learn their fate, many titans of distressed investing are betting on a big payout from bonds tied to bankrupt SVB Financial GroupAppaloosa ManagementSilver Point Capital are part of an eight-member group holding $1.1 billion of the company’s senior notes and roughly $1.5 billion worth of preferred equity, according to court filings, Steven Church and Amelia Pollard report. They’re betting that there will be a big payout from some combination of billions-worth in tax benefits and $2 billion of cash. But it could be a long haul. The case is already dragging as the bankrupt company quibbles with the Federal Deposit Insurance Corp. over seized cash and records.
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Thank you for reading , Bloomberg’s twice-weekly newsletter on corporate crisis and distressed debt. Contact the author of today’s issue via email at [email protected] or Tweet/DM to @JeremyHtweets
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— With assistance by Amelia Pollard, Steven Church, Jonathan Randles, Luca Casiraghi and Neil Callanan
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