Compute providers lock customers into long-term contracts not just for predictable revenue, but because these agreements are prerequisites for securing financing. A bank won't underwrite the construction of a new data center without a multi-year offtake agreement from a credible counterparty, making these contracts foundational to supply growth.

Hyperscalers finance their data center buildout off-balance-sheet through third parties that borrow at high rates. This strategy keeps massive capex and leverage off their own books, protecting their investment-grade credit ratings and making it easier to walk away from excess capacity if demand falters.

Data center projects are often built to a target 'yield on cost,' a key real estate metric. With bond yields rising to 8-9%, the cost of financing inflates the project's denominator. This squeezes profit margins to the point where new projects may become unaffordable for borrowers.

While construction risk is the dominant concern for high-yield data center debt, the structural shortage of power and compute capacity makes it unlikely tenants will exercise termination rights over delays. This suggests that any project-related valuation dips are likely temporary, presenting attractive buying opportunities for investors.

AI data center investments are viable because long-term leases cover initial costs, leaving developers with a valuable future asset. Rising rates increase lease costs and decrease the present value of that future asset, threatening the financial viability of the entire AI infrastructure buildout.

Despite rising borrowing costs from Fed rate hikes, AI infrastructure companies can maintain profitability. The intense, inelastic demand for their services allows them to command double their previous revenue per megawatt, offsetting increased interest expenses.

External capital providers are financing data centers by analogizing them to multi-tenant buildings. They evaluate investments based on expected cash flow and comparable cap rates from commercial real estate (around 6-7%), not on speculative tech market sizes.

Data center operators typically secure long-term tenant leases well before issuing securitized debt on finished facilities. When interest rates surge rapidly, bond yields rise toward 8% while rental revenues remain locked in, creating severe margin compression and suppressing new bond issuance.

While costs for essentials like copper and electricity are rising, cash-rich hyperscalers (Google, Meta) will continue building. The real pressure will be on smaller, capital-dependent players like CoreWeave, who may struggle to secure financing as investors scrutinize returns, leading to canceled projects on the margin.