> ## Content Index > Fetch the complete content index at: https://www.financelygroup.com/llms.txt > Use this file to discover other available public pages before exploring further. # AI Data Centers Have a Credit Problem, Not a GPU Problem - URL: https://www.financelygroup.com/ai-data-centers-have-a-credit-problem-not-a-gpu-problem/ - Published: 2026-08-28T12:17:01.000Z - Updated: 2026-08-28T12:17:01.000Z - Author: Financely Debt Advisors The AI infrastructure boom is creating an unusual financing problem. Developers can order servers, raise construction debt and sign long-term leases. None of that matters if the project cannot secure enough electricity. Power access has become one of the scarce assets in large-scale data-center development. Utilities, transmission providers and grid operators can be required to reserve capacity, perform interconnection studies, expand substations and commit billions of dollars to generation and network infrastructure years before the corresponding data-center load is fully operational. Those counterparties increasingly want credit support before making those commitments. The resulting financing instrument is often not another construction loan. It is a performance letter of credit or Standby Letter of Credit. The Emerging AI Infrastructure Financing Problem A developer can have equity, construction financing, customers and GPUs. If it cannot post acceptable credit support to secure several hundred megawatts of power, the campus may still fail to advance. ## AI Infrastructure Is Becoming a Credit Market The capital requirement is already enormous. In August 2026, S&P Global Ratings said combined capital expenditure among six major hyperscalers is expected to exceed **$1.3 trillion by 2027**. S&P also expects negative free operating cash flow across the group during 2026 and 2027 as investment accelerates. The six companies covered by the analysis are Alphabet, Amazon, Microsoft, Meta, Oracle and SpaceX. S&P specifically highlighted greater use of debt, leases, guarantees, special-purpose vehicles and other financing arrangements as AI infrastructure expands. Earlier estimates already placed 2026 hyperscaler capital expenditure above $600 billion. That investment is flowing into data centers, servers, networking equipment, cooling systems, land, substations, generation and transmission infrastructure. The financing burden therefore extends far beyond the physical data-center shell. $1.3T+ Projected combined hyperscaler capital expenditure by 2027 according to S&P. $600B+ Scale of projected 2026 hyperscaler infrastructure spending. $3.5B Switch syndicated performance LC facility. $630.9M TeraWulf ESA and transmission-related collateral requirements disclosed for Muskie. ## Power Is Different From Servers A server procurement contract ultimately produces equipment. Power procurement can require infrastructure to be committed years before the data-center campus reaches its full contracted load. Transmission may need to be upgraded. New substations may be required. Generation capacity may need to be developed. Utilities can incur substantial costs preparing for a customer whose facility is still under construction. The utility therefore faces an obvious credit problem. If the developer abandons the project, delays commissioning or ultimately consumes materially less electricity than contracted, somebody has to absorb the cost of infrastructure installed for that load. The letter of credit converts a development-risk problem for the utility into a bank-backed credit exposure. ## Data Centers Are Turning Performance LCs Into Infrastructure Finance The underlying instrument is not new. Performance letters of credit and Standby Letters of Credit have long been used to support contractual obligations in energy, infrastructure, construction and commodity markets. What is changing is the scale at which digital infrastructure companies require them. Global Trade Review reported in June that demand for syndicated LCs is increasing as utilities and grid operators seek credit protection around major data-center power arrangements. Of 109 US regulatory filings involving collateral tracked by Halcyon, 67 referred to a letter of credit and another 12 specifically referred to standby letters. The trend is turning the [Standby Letter of Credit](https://www.financely.io/sblc?ref=financelygroup.com)from a familiar bank instrument into an increasingly important component of digital-infrastructure capital structures. ## Switch Created the Clearest Precedent Switch provided one of the clearest examples in April 2026\. The US data-center operator closed a **$2.6 billion syndicated performance letter of credit facility** designed specifically to support power procurement and new transmission and generation resources. The structure was significant for another reason. Switch deliberately separated the performance LC facility from its existing revolving credit and borrowing-base facilities. BBVA and Natixis CIB acted as structuring banks, initial coordinating lead arrangers and joint bookrunners. Less than two months later, Switch increased the LC facility from $2.6 billion to **$3.5 billion**. Its corporate revolving credit facility was also expanded to more than $6 billion, creating almost $10 billion of combined liquidity and credit-support capacity. | Switch Facility | Capacity | Purpose | | --------------------------- | ------------- | ---------------------------------------------------------- | | **Corporate revolver** | More than $6B | Corporate liquidity and development capital | | **Performance LC facility** | $3.5B | Power procurement, generation and transmission obligations | That separation is one of the most important developments in the structure. ## Why the Power LC Is Being Taken Out of the Revolver A conventional corporate revolving facility is valuable because it gives the developer cash flexibility. It can fund construction expenditures, working capital, equipment deposits, land costs, contractor payments, contingencies and temporary project-level funding gaps. If several billion dollars of that facility are simultaneously reserved for letters of credit, the developer may technically have a large revolver but considerably less cash availability. Dedicated LC capacity solves that problem. The developer keeps contingent credit obligations in one facility and funded liquidity in another. Revolving Credit Facility Construction liquidity, working capital, project expenditure, contingencies and corporate funding. Dedicated Power LC Facility Contingent credit support for utilities, transmission providers, generation projects and other power counterparties. Both facilities use bank credit capacity, but only one is principally designed to provide cash. ## Unfunded Does Not Mean Free This distinction is particularly important. Natixis describes the Switch structure as a **non-funded performance LC facility**. The participating banks are not advancing $3.5 billion of construction cash when the facility is issued. They are committing their balance sheets to support obligations of the applicant up to the permitted amount. Cash becomes relevant if a beneficiary makes a complying drawing and the bank has to honour the LC. The structure therefore allows the developer to provide substantial bank-backed security without depositing the full face amount as cash with every utility counterparty. Need Credit Support for an Infrastructure Project? Financely structures project finance, Standby Letter of Credit and guarantee requirements for eligible infrastructure sponsors with defined contracts, counterparties, collateral requirements and repayment capacity. [Request a Quote ](https://www.financely.io/requestaquote?ref=financelygroup.com) ## TeraWulf Shows How Quickly the Collateral Requirement Grows TeraWulf provides another useful illustration through its public SEC filings. Its energy services agreement for the Muskie Data Campus requires **$310.7 million** of collateral in the form of letters of credit or a parent guarantee. A separate letter agreement covering transmission and related infrastructure requires up to another **$320.2 million** of collateral through scheduled installments. Together, the disclosed requirements can reach approximately **$630.9 million**. TeraWulf disclosed that it had already posted $360.7 million of letters of credit in July 2026, comprising the $310.7 million ESA requirement and the initial $50 million transmission-related installment. Energy Services Agreement $310.7M Transmission Infrastructure Up to $320.2M LCs Posted by July 2026 $360.7M The Muskie example makes the commercial problem clear. Interconnection and electric-service collateral can become a nine-figure financing requirement before the developer has finished constructing the corresponding campus. ## The Queue Position Has Become a Financial Asset Access to a credible interconnection pathway can materially affect the value of a data-center development site. A parcel of land with fiber and zoning but no realistic power pathway is fundamentally different from a campus with utility commitments, transmission studies and a scheduled load ramp. Developers therefore need to protect the contractual and interconnection positions that turn ordinary land into powered infrastructure. Credit support is increasingly part of the price of maintaining those positions. If power access is scarce, the ability to post acceptable collateral becomes part of the developer's competitive advantage. ## Why These Facilities Are Being Syndicated A $50 million standby can often be handled within an existing bilateral banking relationship. A multi-billion-dollar performance LC facility creates a different concentration problem. One institution may not want to consume the required counterparty limit, capital allocation or sector concentration for the entire facility. Syndication distributes exposure across several banks. In the Switch transaction, the facility was distributed across multiple international financial institutions. The structure gives the borrower significantly greater aggregate capacity than a single bilateral issuer might provide. | Structure | Suitable Requirement | Main Constraint | | ------------------------------------- | ----------------------------------------------------- | ------------------------------------------------------- | | **Bilateral LC** | Individual utility or project requirement | Single-bank limit | | **LC sublimit under revolver** | Recurring corporate requirements | Consumes revolver availability | | **Standalone syndicated LC facility** | Large multi-project or multi-beneficiary requirements | Syndication, documentation and borrower credit capacity | ## Multi-Beneficiary Facilities Are the Logical Next Step Large data-center platforms rarely deal with one power counterparty. A development pipeline can contain several campuses, utilities, transmission providers and energy contracts across different states. A scalable LC structure therefore needs to accommodate multiple beneficiaries and repeated issuance requests without reopening the entire financing every time another project reaches an interconnection milestone. The facility agreement can establish aggregate limits, issuer mechanics, utilization conditions, permitted beneficiaries, collateral requirements, reimbursement obligations and issuance procedures. Individual LCs can then be issued within that framework as qualifying obligations arise. ## The LC Amount Does Not Stay Flat Power-related collateral requirements can move with the underlying development programme. Early requirements may support feasibility studies or initial transmission work. Later milestones can require substantially larger security as the utility commits physical infrastructure and the developer's contracted load increases. Once the facility is operating and the customer's obligations reduce, collateral can potentially step down under the relevant contract. This creates a natural borrowing-base style discipline around the LC portfolio. The developer needs to forecast utilization by beneficiary, campus, milestone, expiry and expected release date. ## Instrument Wording Matters More Than Developers Expect A performance LC is not useful merely because a bank is willing to issue one. The beneficiary has to accept the issuing bank, wording, expiry mechanics and drawing conditions. Utilities and system operators can have highly specific collateral forms. The instrument may need to be irrevocable, automatically renewable and issued by an institution meeting prescribed credit standards. That is why LC drafting has to be integrated into the financing process before the facility closes. A billion dollars of theoretical bank capacity is not useful if the beneficiary refuses the instrument form. ## A Drawing Converts Contingent Credit Into Funded Exposure Calling the facility unfunded does not make the risk disappear. If the developer defaults and the beneficiary submits a complying demand, the issuing bank may have to pay. The borrower then owes reimbursement to the bank under the credit agreement. Banks therefore underwrite the applicant as seriously as they would for other forms of contingent credit. Financial covenants, collateral, guarantees, cross-defaults, negative pledges, reimbursement provisions and other protections can all become relevant. ## The LC Facility Sits Beside the Project Capital Stack An AI campus can require several financing facilities at once. The sponsor may have corporate revolving credit, land financing, construction debt, equipment financing, securitized debt against stabilized facilities and separate power-related guarantees. Financely's [project finance advisory](https://www.financely.io/projectfinance?ref=financelygroup.com)work focuses on the interaction between these layers rather than treating each instrument as an isolated financing request. Sponsor Equity ↓ Construction Debt / Revolver ↓ Equipment and Project-Level Financing ↓ Dedicated Power LC Facility ↓ Stabilized Asset Financing / ABS / Refinancing ## Supplier Standbys Could Be the Next Layer Power is not the only constraint in a hyperscale development. Transformers, switchgear, generators, cooling equipment, servers and advanced semiconductor products can involve long manufacturing lead times and significant supplier commitments. A supplier reserving production capacity for a large customer can seek bank-backed assurance that the purchaser will honour its procurement obligation. That means the same corporate credit architecture used for utility LCs can potentially support other contractual standbys as the project progresses, subject to facility eligibility and lender approval. ## What Banks Will Underwrite The existence of a valuable interconnection slot is not enough to obtain a multi-billion-dollar LC facility. Banks will still examine: - sponsor capitalization; - corporate and project-level leverage; - tenant commitments; - power and transmission agreements; - development budgets; - equity funding requirements; - construction completion risk; - LC drawing conditions; - beneficiary concentration; - issuer concentration; - reimbursement capacity; - liquidity after a hypothetical drawing; and - the sponsor's ability to continue developing the project after a downside event. The better the sponsor's contracted pipeline and balance-sheet support, the easier it becomes to syndicate significant contingent exposure across multiple institutions. ## This Is Becoming a Financing Product Switch called its original $2.6 billion facility the first of its kind in the data-center industry. The facility was expanded to $3.5 billion within weeks. GTR reports that other developers and banks are now working on similar structures, while Natixis has described power access as a central bottleneck for AI and cloud infrastructure. That is enough to suggest the structure is moving beyond a bespoke transaction for one unusually large borrower. Dedicated syndicated power-LC facilities are emerging as a separate financing product for hyperscale digital infrastructure. ## The AI Bottleneck Is Becoming a Balance-Sheet Problem The AI financing debate usually focuses on the cost of chips, construction and data-center debt. The quieter constraint is contingent credit capacity. Developers increasingly need banks willing to put billions of dollars of balance sheet behind power commitments that may remain outstanding throughout a multi-year development cycle. Those facilities protect utilities and ratepayers. They also allow developers to preserve construction cash rather than posting enormous deposits. If access to power determines which AI campuses actually get built, the ability to arrange LC capacity may become almost as important as the ability to raise construction debt. Structuring a Large Infrastructure Credit Requirement? Financely advises infrastructure sponsors and operating companies on project debt, Standby Letters of Credit, performance guarantees, bridge facilities and structured credit solutions for multi-million-dollar transactions. [Request a Quote ](https://www.financely.io/requestaquote?ref=financelygroup.com) Primary Sources and Further Reading - [S&P Global Ratings on AI infrastructure investment and credit ](https://press.spglobal.com/2026-08-27-AI-Infrastructure-Investment-To-Exceed-1-3-Trillion-By-2027%2C-S-P-Global-Ratings-Says?ref=financelygroup.com) - [Switch on its $3.5 billion performance LC facility ](https://www.switch.com/switch-expands-corporate-revolving-credit-and-letter-of-credit-facilities-to-nearly-10-billion/?ref=financelygroup.com) - [TeraWulf SEC filing detailing Muskie collateral requirements ](https://investors.terawulf.com/sec-filings/all-sec-filings/content/0001083301-26-000166/wulf-20260630.htm?ref=financelygroup.com) - [Natixis CIB on power performance LCs for AI infrastructure ](https://home.cib.natixis.com/articles/megawatts-megabytes-how-trade-finance-fuels-the-ai-boom?ref=financelygroup.com) Financely provides structured finance, project finance and bank-instrument advisory services. Financely is not a bank or direct lender and does not itself issue letters of credit, guarantees or commit lender capital. Facilities remain subject to applicant credit quality, KYC, AML, sanctions screening, beneficiary acceptance, issuer criteria, collateral or reimbursement arrangements, definitive documentation and independent bank approval.