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Rating action

Scope Ratings UK Limited (Scope) has assigned a preliminary rating to the Class A-2 notes expected to be issued by Vantage Data Centers Jersey Borrower SPV Limited. The rating action is as follows:

Class A-1 Variable Funding Notes, up to GBP 100,000,000: not rated

Class A-2 Notes (XS2808281815), GBP 600,000,000: new preliminary rating of (P) A_SF

The preliminary rating relies on the information made available to Scope up to 25 April 2024. Scope will assign a final rating conditional to the review of the final version of all transaction documents and legal opinions. The final rating may deviate from the preliminary rating.

The rating assigned to the Class A-2 notes does not address payment of any additional interest in respect of the Class A-2 notes post the anticipated repayment date in 2029.

Transaction overview

The transaction is a securitisation of data centre lease receivables. The issuer, Vantage Data Centers Jersey Borrower SPV Limited, will use the GBP 600.0m proceeds from the issuance of the Class A-2 notes to refinance existing debt, fund several transaction reserves, finance third-party transaction costs as well as for general corporate purposes, including the development of data centres. Class A-1 variable funding notes, which will finance general corporate purposes, may only be issued after the closing date, subject to conditions which include rating agency confirmation. Once issued, the payment of interest and principal on the Class A-1 notes will rank senior to the respective payments on the Class A-2 notes in the pre-enforcement priority of payments, but pari passu in the post-enforcement priority of payments.

The lease agreements rent out power capacities in two data centres in Newport, near Cardiff, in the United Kingdom. The properties are owned, operated and managed by different subsidiaries of the Vantage Data Centers group (‘Vantage group'). The assets are completed and operational already, with commenced leases accounting for GBP 74.2m contracted annualised rent as of April 2024. Nevertheless, fit-out work is needed in both of them before the additional pre-let power capacities can be handed over to the tenants. Upon completion of all fit-out works, which is expected for July 2025, the total critical load power of the data centres will increase from the current 80MW to 112MW. The combined market value of the properties was estimated at GBP 1.1bn as of January 2024. Therefore, the financing will take place at 54.8% loan-to-value (LTV) at closing.

The notes will pay interest with monthly frequency. The interest rate on the Class A-2 notes is expected to be a fixed rate of 6.7% p.a., while the Class A-1 notes are expected to pay a variable rate referenced to SONIA with a 2.75% p.a. margin. The Class A-2 notes feature an anticipated repayment date in 2029, five years after closing, when the issuer may redeem the notes. The Class A-1 notes’ anticipated repayment date is in 2026, two years after closing, which can be extended twice by an extra year. There is no scheduled principal amortisation before the anticipated repayment dates. If the notes are not repaid by their respective anticipated repayment date, additional interest will start to accrue on the corresponding class of notes, and an ongoing sweep of the excess cash will grant principal amortisation until the legal final maturity in 2039, fifteen years after closing. As described in the pre-enforcement priority of payments, interest and principal payments on the Class A-1 notes rank senior to those payments on the Class A-2 notes. As a result, the cash sweep would result predominantly in a reduction of Class A-1 notes’ balance. The Class A-2 notes’ balance would start to amortise only after full repayment of the Class A-1 notes, therefore the impact on the Class A-2 notes’ balance would be limited.

Rating rationale

The rating reflects: i) the transaction’s legal and financial structure; ii) the quality of the underlying collateral; iii) the Vantage group’s experience and incentives as data centre manager; and iv) the transaction’s exposure to key counterparties.

The rating is primarily driven by the characteristics of the lease portfolio with tenants of good credit quality (with the largest tenant of AAA credit quality), rent escalation, long lease terms without break options and high fees in case of lease termination. The rating is also supported by protective financial covenants as well as by high expected recovery in case of default, as a result of overcollateralisation. The rating is constrained by the risk associated with the completion of ongoing fit-out works and the sizing of the liquidity reserve, which covers three months of debt service.

The transaction is exposed to the following key counterparties: i) Barclays Bank PLC as issuer account bank; ii) National Westminster Bank Plc as propco account bank; iii) FM Insurance Company Limited and Zurich Insurance Company Limited as insurers; iv) Vantage Data Centers Europe S.à.r.l, Vantage Data Centers United Kingdom Opco Limited and VDC UK Management Company Limited as data centre managers; and v) Elavon Financial Services DAC as principal paying agent. Counterparty risk is mitigated by the credit quality of the counterparties, structural mechanisms such as replacement rating triggers, limited time exposure, and the long-standing data centre operating expertise of the Vantage group. Scope has assessed the credit quality of the counterparties considering public information and Scope’s ratings where available.

Key rating drivers

Tenants’ credit quality and long lease terms (positive)¹. The properties are almost fully let. Upon stabilisation, investment-grade rated tenants will account for around 90% of the contracted annualised rent and the weighted average unexpired lease term will be around nine years. The largest tenant holds AAA public ratings from two of the largest credit rating agencies and all its new leases have a 15-year original term. The high credit quality of the tenants combined with a long remaining lease term ensures stable cash flows.

Strong structural protection (positive)². The transaction features several financial covenants which protect noteholders against adverse developments. A test performed at each payment date ensures that deleveraging starts in case LTV increases above 70%. Different debt service coverage ratio covenant levels – starting at 1.5x – ensure that a substantial reduction in rental income also results in amortisation of the outstanding notes’ balance. After the anticipated repayment date of each class of notes an ongoing cash sweep will be applied regardless of the financial metrics. In each case, the principal repayment starts with the senior ranking Class A-1 notes (if any), and the Class A-2 notes’ balance will start to amortise only after full repayment of the Class A-1 notes.

High-quality data centres and experienced sponsor (positive)³. The Vantage group has a global track record in developing and operating data centres. The properties are built to high industry standards, and as demonstrated by the commitment in the lease agreements, can provide 99.999% uptime. The properties also benefit from renewable energy sources.

Strong fundamentals in the data centre market (positive)⁴. Demand for data centres is growing, driven by digitalisation, artificial intelligence, cloud computing, and the extensive demand for data, while supply is limited. High costs, time need of construction, power capacity constraints are significant entry barriers. This is an incentive for tenants to renew the existing leases, which contributes to maintaining healthy cash flows, and supports sustainability of the properties’ market value.

Fit-out risk (negative)^3,5. As of April 2024, there is a total GBP 135.9m capital expenditure remaining for completion of the fit-out works, GBP 123.8m thereof not covered by a dedicated capex reserve. In the property which is let to a single tenant, time overruns by more than 90 days would give lease termination right to the tenant for the leases starting in the future. Any delay in handovers would hinder cash flow stabilisation, which would be further jeopardised, should the termination rights be exercised. Nevertheless, Scope deems severe delays as well as the termination rights’ exercise unlikely, as it is against the interest of the major tenant, which seeks additional data centre capacities.

Liquidity coverage (negative)². The transaction features a liquidity reserve which covers only three months of interest and Class A-1 commitment fee payments, providing protection against short-term liquidity shortfalls. However, the risk is mitigated by the large share of high credit quality tenants contributing to the rental income.

Potential technological innovation adversely affecting data centres (negative). Unlike traditional commercial real estate asset types, data centres are heavily reliant on the fast-changing high-tech environment. Scope believes in the short-term demand for data centres will be high, but the total 15 years until the final maturity may provide room for development of new technologies or tightening in artificial intelligence regulation, resulting in declining interest for data centres.

Concentration of rental income (negative)¹. The two largest tenants account for more than 80% of the current contracted annualised rent. Diversification of the rental income increases transaction resilience against tenant departures. The risk is mitigated by both tenants’ high credit quality, long lease terms and high termination fees.

Rating-change drivers

Positive: a significant increase in rental income as a result of new lease agreements could positively impact the rating.

Positive: a timely and successful completion of the fit-out works may positively impact the rating.

Negative: severe delays in the completion of the fit-out works may negatively impact the rating.

Negative: a material reduction in rental income as a result of new lease agreements could negatively impact the rating.

Quantitative analysis and assumptions

Scope analysed the transaction’s cash flows as per the approach detailed in Scope’s CRE Loan and CMBS Rating Methodology. Scope derived the expected loss, expected weighted average life and default probability of the rated instrument by using rating-scenario dependent assumptions.

The analysis considers that the likelihood of a default of commercial real estate (CRE) securities is two-fold: i) term default risk relates to the borrower’s failure to service its contractual interest and principal obligations during the term and ii) refinancing default risk relates to the borrower’s failure to refinance at the legal final maturity of the notes. Scope’s cash flow modelling considers contracted rental income, and, after lease expiries or tenants’ default followed by a void period, an estimated rental income, which is the then-current market rent reduced by haircuts. Tenant solvency in each period is determined by a Monte Carlo simulation which factors in the tenants’ individual credit quality. The cost assumptions take into account characteristics of the properties and, in this particular case, follow the figures set out in the transaction documents. The cash flow analysis also considers the transaction’s liability structure, the interest and commitment fee payable on the notes, the reserves, the costs ranking senior to debt service and accounts for potential delays against the expected ready-for-service dates. Refinancing risk is captured through the modelled debt yield at maturity. The calculated value of each property equals the capitalised net cash flow at an appropriate capitalisation rate using an income valuation approach. The recovery proceeds in case of a default equal to the modelled value of the property portfolio at the end of the foreclosure period net of liquidation costs.

Scope assessed the tenants’ credit quality based on public ratings where available and assumed B credit quality for unrated tenants. The tenants’ assumed credit quality ranges from CCC to AAA, with an A+ weighted average portfolio level credit quality. Based on its framework for transactions which include refurbishment/construction risk, Scope assumed that the forward starting leases would start six to nine months later than the expected ready-for-service date. At the assigned A rating level, Scope assumed the void periods, which reflect temporary vacancies following a lease discontinuation event, to last for 20 months. Scope does not model the renewal of any leases. Scope considered an estimated rental value (ERV) of GBP 90.0/kW/month. This assumption factors in that the current rents paid by the tenants vary in a wide range, depending on several factors, such as the size of the leased capacity, the rental contract’s signing date and individual features. Scope adjusted down the ERV by a 20.8% haircut and considered 10% structural vacancy limiting rental income and property value in the long term. Scope’s cost assumptions follow the transaction documents, such as, for CWL11 and CWL13 property tax and insurance at GBP 3.9 and GBP 2.6 /kW/month, respectively, budgeted operating expenditures at GBP 13.0 and GBP 11.2 /kW/month, respectively, budgeted maintenance capital expenditure being GBP 35.8/kW p.a. from 2025, and management fee accounting for 3% p.a. of rental income. The modelled costs also include the head rent payable in relation to CWL11, which will gradually increase as a result of RPI-linked uplifts.

To determine the properties’ sustainable cash flows which are used for the market value calculation, Scope applied a 10% sustainable rental value haircut to the assumed market rent, to reflect that the build of new data centres and/or technological innovations may result in limited increase in market rents. Under the A scenario, Scope capitalised the net cash flows generated by the CWL11 and CWL13 properties by 9.3% and 8.5% capitalisation rates, respectively, to determine the property value. Liquidation costs accounted for 1.5% of the notes’ outstanding balance, capped at GBP 1.7m, plus 8% of the modelled portfolio market value as well as an additional 24.6% of the modelled portfolio market value, in line with Scope’s framework applied to CRE securities which include refurbishment/construction risk.

Sensitivity analysis

Scope tested the resilience of the credit rating against deviations in certain input parameters. This analysis has the sole purpose of illustrating the sensitivity of the credit rating to input assumptions and is not indicative of expected or likely scenarios. The following shows how the results for the Class A-2 notes change compared to the assigned rating in the event of:

• 20% higher rental value haircut: zero notches;
   
• 20% higher capitalisation rates: zero notches;
   
• 100% higher structural vacancy: zero notches;
   
• GBP 50m Class A-1 notes’ issuance in six months and further GBP 50m in twelve months: zero notches.

Rating driver references
1. Data tape (Confidential)
2. Offering circular (Confidential)
3. Lease abstracts (Confidential)
4. Scope research
5. Capex projections (Confidential)

Stress testing
Stress testing was considered in the quantitative analysis by considering scenarios that stress factors, like rental value haircuts and capitalisation rates, contributing to sensitivity of Credit Ratings and consider the likelihood of severe collateral losses or impaired cash flows.

Cash flow analysis
Scope Ratings performed a cash flow analysis of the transaction incorporating relevant asset assumptions and taking into account the transaction’s main structural features, such as the instruments’ priority of payments, the instruments’ size and coupons. The outcome of the analysis is an expected loss rate and an expected weighted average life for the instruments based on the generated cash flows.

Methodology
The methodologies used for this Credit Rating, (CRE Loan and CMBS Rating Methodology, 3 November 2023; General Structured Finance Rating Methodology, 6 March 2024; Counterparty Risk Methodology, 13 July 2023), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions - Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/uk-regulation. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Rating: public domain, the Rated Entity, the Rated Entities’ Related Third Parties, third parties and Scope Ratings’ internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Rating originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Scope Ratings has received a third-party asset due diligence assessment/asset audit. The external due diligence assessment/asset audit was considered when preparing the Credit Rating and it has no impact on the Credit Rating.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Rating and the principal grounds on which the Credit Rating are based. Following that review, the Credit Rating was not amended before being issued.

Regulatory disclosures
This Credit Rating is issued by Scope Ratings UK Limited at 52 Grosvenor Gardens, London, United Kingdom, SW1W 0AU, Tel +44 20 7824 5180. The Credit Rating is EU-endorsed.
Lead analyst: Adam Plajner, Associate Director
Person responsible for approval of the Credit Rating: Benoit Vasseur, Managing Director
The Preliminary Credit Rating was first released by Scope Ratings on 30 April 2024. The Credit Rating concerns a financial instrument that has been rated by Scope Ratings for the first time.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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