BREAKINGVIEWS-Century bond jumps through data centre funds hoops

By Antony Currie

MELBOURNE, April 9 (Reuters Breakingviews) - When is 100 years not 100 years? When investment bankers tinker with time. Consider the A$1 billion ($707 million) hybrid debt deal that data centre builder and operator NextDC NXT.AX has launched, with Canada's La Caisse as the major investor. Officially it's a century bond, but the wizards at Australian boutique Barrenjoey structured it to incentivise the issuer to buy it back after five years. The deal is an example of how the cloud-to-artificial-intelligence industry is jumping through hoops to secure funding.

It's not that NextDC is in financial trouble. The company is growing fast, with core EBITDA expected to more than double to A$516 million between 2025 and 2028, per LSEG data. And in December it signed OpenAI as a tenant.

But the $8.5 billion firm's needs outweigh its resources, making its stock highly sensitive to capital-raising plans. Shares shot up 17% when the company run by Craig Scroggie unveiled a new bank loan facility in August, taking its war chest to A$4.2 billion. Yet it expects to spend almost A$7 billion over the next three years. A project in Sydney is likely to cost A$15 billion. Banks in general are starting to get tapped out, either to individual credits or to the sector as a whole.

A couple of other funding options have not yet panned out. Last month, for example, it put on hold its plans to issue a A$500 million bond, in part because executives deemed the 8.5% interest rate investors wanted too high, the AFR reported - the stock dropped 20%.

Tuesday's hybrid deal is initially cheaper at 7.5% and provides some breathing room. All other debt is senior to it in the event of bankruptcy, which along with the 100-year maturity gives it the air of permanent, equity-like capital. It reassures the banks that NextDC has other sources of funding that won't threaten their ability to recoup their loans.

Yet by increasing the coupon to 9.2% in 2031, and even higher thereafter, the structure makes repurchasing the debt almost inevitable, effectively turning it into a five-year subordinated bond complete with tax deductibility for interest payments.

There's a catch: whether NextDC buys the debt back or not, it must give investors a top-up payment so that their total yield for the first five years is 9.2%. So while it helps provide relatively inexpensive financing for a while, this century bond is not attractive as a long-term funding mechanism. But Scroggie and his team could use the success to resurrect previous capital-raising plans. And it all fits with a broader snippet of AI funding lore: the expense is worth it if profit soars.

Follow Antony Currie on Bluesky and LinkedIn.

CONTEXT NEWS

Data centre builder and operator NextDC on April 7 launched an offer to raise A$1 billion ($703.2 million) in subordinated hybrid securities, with Canadian asset manager La Caisse, formerly CDPQ, committing to underwrite the transaction.

The securities mature in 100 years but can be redeemed by NextDC after five years and at various points thereafter. The company will pay an annual coupon of 7.5% for the first five years, at which point it increases to 9.2%. Investors will also receive a special one-off payment that takes the total interest paid in the first five years to 9.2%; that payment is also due if NextDC chooses to redeem the securities.

If the debt is left outstanding, the coupon increases in small increments over the next five years, and then by five percentage points at the end of the 10th year.

NextDC can also defer coupon payments.