HSBC Seeks to Hedge Data Center Debt With Credit Risk Insurance
HSBC Holdings Plc is looking to offload credit risk on data center loans to insurers as demand for artificial intelligence-related finance continues to grow.
The bank is holding preliminary discussions with insurers about a series of project finance deals, some of which are tied to AI infrastructure, according to people familiar with the matter. The deliberations follow an earlier assessment of insurers’ appetite to cover a portfolio exclusively focused on data centers, they said, asking not to be identified because the matter is private.
Talks are at an early stage and may not lead to any deals, they added. A representative for the London-based lender said the plans are part of its normal portfolio management, noting that exposure to data centers is small.
Credit risk insurance, like significant risk transfers, allows banks to mitigate losses and free up regulatory capital that can be used to bid for more business. In SRTs, investors typically deposit liquid assets upfront to cover the risk on the first-loss tranche of a portfolio in return for coupon payments. With CRI, lenders pay premiums to cover an agreed percentage of losses on specific loans.
With trillions of dollars likely to be spent on AI infrastructure in the coming years, companies are expected to turn increasingly to debt financing, from asset-backed securities to private credit and syndicated loans, as cash flows and equity won’t stretch far enough.
There are early signs that credit markets are having difficulty digesting the flood of AI-related exposure. Yields on bonds and loans tied to the AI buildout are soaring, and some insurers have indicated their capacity is close to being exhausted.
In addition to sounding out insurers, HSBC has been working on an SRT tied to a portfolio of more than $1 billion of data center-linked loans. The lender is assessing ways to hedge its exposure even though it isn’t a major player in this type of finance.
“We are not a big player at all in the US in data center lending, same in Asia – this is not a significant part of our growth story,” Chief Financial Officer Pam Kaur said during an earnings call this week.
Others are making similar moves. Barclays Plc is looking for insurance on more than $10 billion of AI-infrastructure credit, while Deutsche Bank AG has been working on an SRT tied to about $2 billion in project finance debt, including data center loans.
Photograph: An HSBC branch in Vancouver, Canada; Photo credit: Taehoon Kim/Bloomberg