Jane Street-Linked Data Center Debt Sours

Secretive Wall Street trading firm Jane Street has become famous in the past couple of years for its sizable AI-related spending, as it has struck big cloud deals to handle its AI computing needs and made investments in neocloud CoreWeave. Yet even a Jane Street–related deal for data center debt hasn’t won over investors.

Debt sold by a venture building a data center to be leased by Jane Street has quickly soured in secondary trading, according to Financial Industry Regulatory Authority data. Yields on the bonds have risen to around 11.3%, more than 2 percentage points above where the debt first sold in August. That deterioration has been sharper than for other recently issued AI data center bonds, with investors demanding far higher compensation to hold them versus government debt.

The Jane Street–linked debt has emerged as an important test of how far the data center financing boom can grow. To date, big, highly rated companies like Google and Amazon, which can borrow relatively cheaply in the investment grade market, have directly issued much of the debt behind the AI data center build-out.

Since last year, more AI data center financings have come from companies that are not investment grade, such as neoclouds, as well as from project-specific vehicles to build new data center campuses. Still, most of those projects ultimately have big tech customers with investment-grade ratings. For debt tied to data centers for younger customers like Anthropic and OpenAI with no credit rating, highly rated tech companies are often providing some sort of credit backstop.

But the recent Jane Street data center deal didn’t have that kind of backstop, and Jane Street itself doesn’t have an investment-grade rating from S&P Global. The entity that issued the $2.25 billion debt, Zenith Arc, was a subsidiary of a joint venture between AI infrastructure startup Fluidstack and Next Frontier, a data center development venture launched by Coatue Management.

The proceeds are funding a 149 megawatt data center in Oklahoma, where Jane Street is the tenant and end user of the data center, and will also guarantee the lease obligations.

Jane Street Group carries a BB rating from S&P Global, two notches below investment grade. The Zenith Arc debt in turn carries the same rating from S&P Global, with analysts noting the project’s creditworthiness is essentially capped there, given how heavily it relies on Jane Street’s lease payments to service the debt.

Privately held Jane Street typically keeps a low profile despite being one of Wall Street’s biggest trading firms, but it has been notably aggressive in its efforts to land AI compute and related investments. Jane Street was an early OpenAI customer, and has inked cloud deals with companies including CoreWeave while making an equity investment in the neocloud. Jane Street is also an investor in Fluidstack.

To be sure, financing costs have been climbing across the board for AI companies. But if investors are demanding comparatively higher payments to back a data center used by big but lower-rated companies such as Jane Street, developers may struggle to find financing to provide other potential customers outside big tech with their own dedicated space. That would slow the pace of the build-out.

The Zenith Arc debt started off relatively expensive, as it initially sold slightly below face value with an 8.875% coupon and at a 4.67 percentage point premium to yields on benchmark government debt. That marked among the widest spreads at issuance among high-yield, senior secured data center and neocloud debt tracked by Bank of America analysts in recent months.

A bond’s spread measures the extra compensation investors are demanding over benchmark interest rates. Tracking the spreads can make it easier to compare bonds issued at different times, since underlying interest rates may have changed.

Other similarly structured projects that sold debt into the high-yield market in the months before Zenith Arc’s debut in some cases had lower-rated debt but did have an investment-grade guarantee somewhere in the deal. That seems to have kept a lid on those spreads.

In April, Meridian Arc, another joint venture between Fluidstack and Coatue’s Next Frontier, issued $5.7 billion of bonds to fund an Indiana data center campus. Fluidstack has agreed to lease the facilities, but Google is providing a guarantee for those lease obligations. Those bonds were issued at a much tighter spread than Zenith Arc’s, of 2.33 percentage points.

Most of the decline for the bonds has come since Sept. 8, according to the data compiled by Finra. That was the last day the bonds yielded below 10%, the data show. And, in the meantime, the spread on Zenith Arc bonds has widened more than a percentage point.

Meanwhile, the AI-linked high-yield debt market broadly has seen spreads tighten somewhat since earlier this month, after hitting highs of 3.35 percentage points on Sept. 9, Bank of America analysts noted on Thursday. That includes moves tighter for data center debt issued by entities linked to Galaxy Digital and Cipher Digital projects.

CoreWeave has seen spreads on its corporate bonds widen further than the Zenith Arc project debt, though those two aren’t directly comparable. CoreWeave’s corporate bonds are unsecured, meaning they aren’t backed by specific assets. Zenith Arc’s bonds are backed by assets tied to the data center project.