Banks insure AI data-centre loans to lend past their limits

What's the deal? Banks are buying credit insurance on their AI data-centre loans to lay off risk and lend more into the AI boom. Barclays recently bought cover for its AI infrastructure exposure, HSBC has explored the product, and JPMorgan ChaseDealroom has a profile for this one. Try Dealroom → considered it but decided against, according to the Financial TimesDealroom has a profile for this one. Try Dealroom →, citing people familiar.

Why now? As big tech pours money into AI infrastructure, internal risk controls cap how much any bank can lend to a single company, project, or sector. Insurance lets lenders stretch those limits. "Even if banks are not able to get capital relief, they're able to get . . . relief to lend more to data centres by using this hedge," said Azi Larsen, a broker at Marsh.

By the numbers: In a typical deal, a bank transfers 20% to 50% of its exposure to insurers, freeing capacity for larger loan packages. Insurers demand annual premiums of 50% to 70% of what banks stand to make on the insured slice.

Who's involved? AIG, Chubb, and Axa are among more than 70 providers of project-finance credit insurance, up from a handful a decade ago. US banks, which generally get no capital relief from such cover, have typically used credit default swaps — but rising CDS costs and the scale of AI debt have pushed several to explore insurance in recent weeks, brokers said.

What could go wrong? Credit insurance shifts risk rather than removing it. A May Willis Towers Watson survey found some credit insurers near or at their data-centre exposure limits, raising questions about how much more capacity the market can absorb.

Why it pays out: The cover triggers on default, whatever the cause. That matters as the US building boom draws opposition — 38 ballot measures opposing data centres passed in last week's midterms. "As long as the bank has abided by the terms and conditions of the policy, they just have to demonstrate that there was a default," Larsen said.

The signal: AI infrastructure lending is increasingly reliant on insurers and investors taking on risk banks are reluctant to retain. With banks arranging packages as large as roughly $38 billion for Oracle-linked campuses and Deutsche Bank working on risk-transfer deals tied to about €2 billion of project-finance debt, risk distribution is becoming the backbone of the AI financing machine.

Read more: Financial Times

Image credit: North Charleston