As investment in data centres continues to accelerate, bankability has become a defining issue for developers, operators and funders. Given the sheer capital required to build at scale, operators have to turn to debt and project financing in order to have the money to develop the data centre. While the physical building and land remains important, lenders increasingly focus on the contractual framework that underpins a project’s revenue. In practice, that means close scrutiny of customer contracts as the key revenue-generation assets.
In simple terms, bankability is about whether a data centre project can support third-party financing on acceptable terms. For data centres, that assessment is rarely driven by the land or building alone. The most valuable element of a data centre business is the revenue generated by customer contracts. It is those contracts that ultimately repay the debt.
This article explores what lenders typically expect to see in data centre customer agreements, why certain provisions attract attention, and how bankability considerations shape contract negotiation across the sector.
Revenue certainty
From a lender’s perspective, customer contracts are not just operational documents. They form a core part of the security package. Even where a site benefits from strong demand and high-quality infrastructure, financing can be challenging if the revenue stream is uncertain due to termination rights that can be activated at will, or on subjective or unclear grounds or due to breaches under other contracts between the parties (or their group companies).
Termination for convenience is often one of the first issues lenders examine. Customers typically want flexibility, even though exiting a data centre arrangement will involve significant operational disruption.
For operators, those operational challenges are usually manageable. The real issue is financial. If a customer terminates for convenience, fees will not be generated, making loan repayment more difficult.
As a result, termination for convenience is generally only acceptable where it is paired with early termination charges. These are often structured on a sliding scale, with the amount payable linked to the timing of termination and reflecting a proportion of future service charges. This helps preserve certainty of revenue visibility which mitigates lender concerns.
Indexation
Long-term revenue projections depend on the ability to increase service charges over time in anticipation of rising costs of labour, materials and utilities. Indexation is therefore an important bankability consideration.
In multi-jurisdictional structures, indexation is often resisted at master agreement level because inflation measures differ between countries. In practice, indexation is more commonly agreed at order level, where it can align with local indices.
For lenders, the key concern is not the index used, but whether there is a clear, regular and contractually certain mechanism for price increases throughout the term.
Contract duration and renewal
Data centre contracts typically have an initial fixed term of around three-five years, together with multiple renewal options. This structure supports business continuity for customers and offers longer-term income visibility for operators.
Renewal rights can become more sensitive where they introduce uncertainty, for example where the number or duration of extensions is highly variable. While this does not usually prevent financing, it can lead to more extensive lender diligence and closer scrutiny of financial modelling assumptions. It is particularly important to ensure that indexation mechanisms continue during these renewals, although numerous, long renewals still present a pricing challenge as there is more risk of significant market pricing movement during a longer period that indexation may not adequately compensate for.
Change of control
Change of control provisions are a standard feature of data centre contracts, particularly where hyperscale customers are involved. Customers quite reasonably want to understand who they are relying on for services that are critical to their own operations. Concerns often relate to sanctions exposure, creditworthiness, industry experience and prior relationships.
At the same time, the data centre sector is characterised by frequent M&A activity and refinancing. Operators need sufficient flexibility to grow and raise capital without triggering termination rights each time ownership or governance changes.
In practice, this leads to detailed change of control clauses. From a bankability perspective, these are usually workable provided they include clear parameters, such as carve-outs for acceptable transferees, agreed credit thresholds and defined notice requirements. Complexity is often unavoidable, but clarity is essential.
Rights to assign
For debt financing to work, lenders must be able to take effective security over customer contracts, most commonly through an assignment by way of security.
Customer agreements need to permit this clearly. Where customers require controls, such as notification obligations or restrictions on whom security may be granted, those mechanisms must be precisely drafted. Ambiguity in assignment provisions is a common issue identified during lender diligence and can delay or complicate funding.
SNDAs
Subordination and non-disturbance agreements (SNDAs) are a recurring point of tension in data centre financing. Hyperscale customers often want comfort that, if an operator defaults on loan repayments and a lender steps in, the customer will not be evicted from the data centre if the lender wants to sell the property to realise the value of the underlying land.
From the customer’s perspective, this is about operational continuity. From the lender’s perspective, overly restrictive non-disturbance provisions can impede enforcement of security. There is no single solution, but this issue requires careful management and reflects the broader balancing act at the heart of bankability in data centres.
Step-in rights
Customers may seek step-in rights, allowing them to take over operation of a facility if the operator is in breach. This is another mechanism designed to protect continuity of service.
However, step-in rights can become problematic where there are multiple customers on a site or where they overlap with lender's own step-in rights. Operators should deal with this expressly, ensuring customer contracts reflect that, where a lender has stepped in and is continuing to operate the facility, the customer’s step-in rights do not apply.
Market standard terms
A recurring theme in lender analysis is whether customer contracts reflect market standard terms for the relevant customer. Hyperscalers, in particular, shape the market through the scale of demand they represent.
Lenders may not regard every term as ideal, but if the overall position aligns with market practice for that customer, they can take comfort that they are not assuming an unusual level of risk. This assessment also extends to familiar contractual provisions such as liability caps, indemnities and service credit regimes.
Looking ahead
Bankability in data centre projects is not a single clause. It is the cumulative effect of risk contained customer contract terms, viewed against market practice, that matters.
The most bankable projects are those where customer agreements are negotiated with funding considerations in mind from the outset. Addressing bankability early reduces friction at financing stage and helps ensure that strong demand translates into an asset suitable as security for the loan as the sector continues to mature.
Read the original article on GowlingWLG.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[View Source]