Morgan Stanley looks to offload AI data center loans

Morgan Stanley ↗ 3.97% is among the large lenders reported to be cutting their exposure to construction loans for artificial intelligence data centers. They are moving parts of that risk to private credit funds and asset managers instead of holding it on their own balance sheets, according to a Simply Wall St analysis published on Yahoo Finance. The banks are looking at selling existing data center loan books to these nonbank buyers, Simply Wall St reported.simplywall.st+1

These reports build on an earlier Financial Times story. It said Morgan Stanley, JPMorgan Chase ↗ 1.51% and SMBC Sumitomo Mitsui Financial Group, Inc. ↗ 3.60% were looking for ways to spread AI data center debt across more investors as they came close to internal limits on how much they can lend to one borrower or sector, Silicon UK reported.silicon.co.uk

How the banks are shedding risk

The banks are considering two main approaches, according to the FT's reporting. One is private sales of pieces of the debt. The other is significant risk transfers, where the loan stays on a bank's books but investors take on part of the default risk in return for a payment, ET EnterpriseAI reported. Lenders including JPMorgan and MUFG Mitsubishi UFJ Financial Group, Inc. ↗ 2.77% spent more than six months trying to sell off $38 billion of construction debt for Oracle-leased ↗ 1.88% sites in Texas and Wisconsin, and some banks tried to sell those loans at a discount. Matthew Moniot of Man Group told the FT the deal sizes were "out of scale to anything we've thought about, ever," Silicon UK reported.enterpriseai.economictimes.indiatimes.com+1

Other banks are doing the same. ING ↗ 3.55% is offering 12 data center loans worth about $500 million, citing Bloomberg, Chosun Ilbo reported. The package includes a $25 million slice tied to the Stargate project in New Mexico, and bids are due by November 19.chosun.com

Lenders turn cautious

The selling comes as banks grow more wary of AI debt overall. On Monday, November 9, Reuters Thomson Reuters Corporation ↘ 2.03% reported that some banks have told market participants they are reluctant to fund new deals, even ones guaranteed by major tech companies. Two causes are a selloff that wiped $2.5 trillion off the Nasdaq-100 on November 5 and the Democratic sweep of Congress in the midterm elections. Data centers now make up a larger share of loan books. At JPMorgan, loans backed by income-producing properties, a category that includes data centers, reached $29 billion by the end of the third quarter, or 12% of its commercial real estate lending, according to Reuters.reuters.com

The pullback has been sharpest for riskier borrowers such as neocloud companies, which rent out AI computing capacity, and standalone data center operators. Oracle and CoreWeave ↗ 5.80% could be hurt by construction delays, according to Reuters.reuters.com

Who absorbs the risk

The open question is how much more AI debt private credit firms are willing to take on. "Debt investors' books have become full and now they are assessing if they have extended themselves as much as they're going to extend themselves this year," Ropes & Gray partner Chris Poggi told Reuters.reuters.com