Six days in July: the staff letter that took data centre bonds outside Dodd-Frank

Latham & Watkins wrote to the Securities and Exchange Commission on 23 July with a narrow question: do data centre securitisations fall outside the Exchange Act definition of an asset-backed security ^[1]. Kayla Roberts, who chairs the SEC's Office of Structured Finance, replied on 29 July that the staff agreed, an exchange that took six days ^[2][3]. That definition matters because it carries the risk retention rules written into Dodd-Frank after the 2008 crisis, which require a deal sponsor to keep some risk on its own books ^[4]. A fortnight later Nvidia announced $500bn of AI infrastructure financing alongside Apollo, BlackRock, Blackstone, Brookfield, Goldman Sachs and KKR ^[5][6]. The argument turns on one phrase. An asset-backed security rests on a self-liquidating financial asset, which the SEC has read since 1992 as one converting into cash within a finite period ^[7]. A mortgage qualifies, because repayment extinguishes it ^[8]. Latham argued a data centre does not: the facilities are tangible and physical, they endure beyond the life of the securities, they may appreciate, and when the notes are repaid the issuer still owns the building ^[9]. Set against a single-asset commercial mortgage deal, where the issuer holds only the loan and ends up with nothing, the comparison held, and the staff accepted it ^[10]. Read the asset list and the reasoning is hard to argue with. The letter describes buildings and data halls, electrical and backup power, cooling, network connectivity, physical security, land, and the contracts needed to run the sites ^[11]. It does not mention chips or graphics processors ^[12]. The economics are where consequence sits. Loan-to-value tops out at 70% of appraised value, notes carry an anticipated repayment date of around five years, and final maturity runs 25 to 30 years ^[13]. That 70% cap leaves at least 30% of appraised value to be funded from somewhere else ^[2], and Orion Mountainspring, a securitisation lawyer at Orrick, told CNBC the response gives sponsors the chance to push that equity down over time, calling it good news for them ^[20]. B.K. Lee at Alston & Bird expects more flexible, more capital-efficient structures and more deals now the guidance exists in writing ^[21]. Nearly all these deals use a master trust, which lets sponsors issue further securities later, add data centres, and in some cases dispose of or substitute assets ^[14]. Investors generally have no recourse to the sponsor or operator, with the usual exceptions for fraud, wilful misconduct and gross negligence ^[15]. Scale matters to how much this moves. Latham told the SEC the market has passed $50bn in cumulative debt issuance since the first deal in 2018 ^[16]; Nvidia's announced number is about ten times that entire history ^[1]. Participants had complied with the asset-backed rules throughout, the letter says, "out of an abundance of caution" rather than because the definition required it ^[17]. Three cautions belong in the same breath. The response reflects the views of the staff of the Division of Corporation Finance, not the Commission, which has "neither approved nor disapproved its content"; it is not a rule and has "no legal force or effect" ^[18]. The staff add that their views rest on Latham's representations, and that different facts or conditions might produce a different conclusion ^[19]. And Seth Messner of Katten Muchin Rosenman, who told CNBC's Tobias Burns that Latham asked the SEC to put these deals outside risk retention and the SEC basically agreed, was more cautious on Nvidia: it is not clear whether its agreements are designed for securitisation, only that the guidance sounds applicable if they are ^[22][23]. Watch whether Nvidia's memoranda of understanding turn into securitisable contracts, since the company has not said whether the platforms will securitise anything ^[26]. Watch the equity in the next deal priced after 29 July, and watch whether the Commission itself ever ratifies what its staff wrote.