DBRS Morningstar Finalizes Provisional Rating of BBB with Stable Trend on Vault DI Issuer LLCProject Finance
DBRS Limited (DBRS Morningstar) finalized its provisional rating of BBB on the Issuer Rating and the provisional ratings of the Series 2021 Class A-1 $25 million variable funding notes (Class A-1 Notes) and the Series 2021 Class A-2 term notes of $225 million (Class A-2 Notes, and together with the Class A-1 Notes, the Senior Notes). The Senior Notes are fully amortizing with a 25-year legal maturity, issued by Vault DI Issuer LLC (Vault or the Issuer), and are backed by a portfolio of seven data centres and the leases in place with the tenants of the data centres. All trends are Stable. The transaction is intended as a refinancing and recapitalization of the existing capital structure, and the proceeds of the Notes will be used to pay off fully existing indebtedness, fund several reserve accounts, pay insurance premiums and taxes, and other general corporate purposes including future development of existing and new data centres in the portfolio. DBRS Morningstar notes that the additional penalty interest tranche associated with the Senior Notes is not rated in this finalized rating.
The indirect owner of the data centres is Vault Digital Infrastructure LP (Vault Digital), a joint venture owned by DIF Capital Partners (49%) and Northleaf Capital Partners (49%), two global mid-market infrastructure investors, (collectively, the Sponsors) and managed by Landmark Dividend, LLC (Landmark) (2%), an experienced operator with a strong track record of data centre management. This indirect ownership is held through Vault Digital's equity interest in DI PropCo LLC (the Parent), the parent entity to two bankruptcy remote special-purpose vehicles (SPVs) that own the fee-simple interests in the data centres (each SPV an AssetCo and, together, the AssetCos). At financial close, the Parent will assign 100% of its equity interests in the AssetCos to the Issuer (also a bankruptcy remote SPV) through a two-step process detailed in the Overview of Transaction section. This two-step process results in the Issuer owning 100% of the equity interests in both AssetCos.
With this transaction structure, the Issuer does not have direct ownership of the data centres and is not a direct counterparty on the tenant leases, but has 100% equity ownership in the AssetCos that do own the data centres and have interests in the tenant leases as lessors. The AssetCos as guarantors of the Notes have pledged and assigned their lease interests in the tenant leases as security, including all rights to rents and revenues generated therein and grant first priority mortgages over their respective fee-simple interests in the data centres. DBRS Morningstar has received and reviewed true sale and substantive nonconsolidation legal opinions in support of the transaction structure.
The data centre portfolio consists of seven data centres located in primary data centre markets in the United States, and representing some 35 megawatts (MW) total of critical load. DBRS Morningstar views the characteristics of the portfolio to be relatively strong in general, comprising data centres with sufficient scale in critical power load and redundancy configuration, which DBRS Morningstar views as essential future-proofing attributes to remain attractive and competitive assets over the term of the debt. DBRS Morningstar also views favourably the locations of the facilities, largely located in top data centre markets in the United States with ready access to low power rates, communications interconnects in close proximity, and natural or artificial climate control, which are critical to cost-effective data centres operations. Each data centre is leased to a corporate tenant via long-term leases; however, regular lease renewal points are embedded within the lease terms, allowing both tenant or landlord to exit the relationship and introducing lease-renewal risk within the term of the debt. DBRS Morningstar does observe that tenants include long-existing corporations in strong and strategic industries including government-related IT services, telecommunications, technology, healthcare, and IT services, which DBRS Morningstar considers to result in high probabilities of lease renewal through the expiry of the lease terms. Notwithstanding, certain facilities exhibit weaknesses that DBRS Morningstar assesses as higher risk; for the purposes of rating case analysis, DBRS Morningstar assumes that either these facilities revert to other less profitable uses, or require significant capital investment to remain competitive; such costs are assumed to reduce lease payments accordingly.
The BBB rating is underpinned by: (1) highly stable cash flow deriving from lease payments to the data centres; (2) the resiliency and “sticky” nature of the revenue stream owing to the critical and strategic nature of the data centre assets to the tenants’ business operations; (3) strong and favourable debt package to noteholders and (4) material upside revenue potential from unleased portions of the largest site in the portfolio. DBRS Morningstar notes the debt and security package offers protections to noteholders typical of that expected of a well-structured project finance transaction. The primary constraints on the rating include (1) re-leasing risk of each lease at various intervals, subjecting the Issuer to the risk of either tenants opting out of their leases or obliging the Issuer to grant concessions as an inducement for tenants to remain; (2) risks related to technical obsolescence or deterioration of competitive position; and (3) lower or nonrated tenants.
Debt servicing of the Notes relies on lease payments received by each AssetCo entity, which are subsequently up streamed to the Issuer. Based on the features of the debt security package, the covenant package provides bondholders with credit protections akin to a traditional project finance transaction with features including guarantees from each of the AssetCos and the Vault DI Guarantor LLC, which owns 100% of the equity interests in the Issuer, fee simple mortgages over the data centres and security interests in all lease revenue received from tenants as well as both the Issuer’s equity interest in each AssetCo entity and the Guarantor's equity interests in the Issuer; a three-month interest-service-reserve account, funded either in cash or through a Letter of Credit; and a restricted payment test (i.e., dividend payment test) with a required minimum Amortization Debt Service Coverage Ratio (DSCR) of 1.30 times (x).
The proposed debt scenarios feature DSCR profiles, as calculated based on DBRS Morningstar's rating case assumptions and revenue haircuts, with a minimum and average DSCR of 2.28x/2.56x (effectively an interest coverage ratio (ICR)), and a refinance DSCR at the five year mark of 1.18x (min) / 1.29x (average) based on DBRS Morningstar’s rating case, which incorporates the constraints and challenges of the project. The minimum/average DSCRs in the first five years, combined with the refinance metrics, are consistent with a BBB(low) rating. DBRS Morningstar has applied a one-notch uplift to account for the soft refinance nature of the debt, in which a failure to refinance does not lead to a default but rather to a cash sweep where all cash after expenses and interest payments are swept to principal; DBRS Morningstar notes in the exceedingly unlikely event that the Sponsors do not refinance the debt for the full duration to legal maturity, cash flows of up to 20% lower than the rating case assumptions are still sufficient to fully amortize debt.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
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The principal methodologies are Rating Project Finance (September 1, 2020, https://www.dbrsmorningstar.com/research/366229) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021, https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021, https://www.dbrsmorningstar.com/research/373262).
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