Lawyers join microchips on the list of data centre must-haves

The new hot commodity in the AI data centre boom? It’s not microchips, but a sharp-elbowed legal team. A dispute has broken out involving Oracle, the US tech giant that rents, equips and then sublets data centres to companies such as OpenAI. It suggests that in the already complex web of relationships in the data centre value chain, there’s yet another risk investors may have initially overlooked.

Oracle is on the hook to lease a data centre in New Mexico that looks in danger of political and regulatory delays. As a result, Oracle may invoke force majeure, the “act of God” exemption that can allow companies to wriggle out of their obligations, Bloomberg has reported. The traded price of the $18bn of debt backing the data centre has fallen to about 90 cents on the dollar.

Even then, Oracle may still be on the hook for so-called carry payments to the data centre’s investors, the FT has reported, even if that means it is in effect paying for a data centre with no electricity.

The stampede to blanket the planet with data centres that can run AI operations, which is likely to run close to double-digit trillions of dollars by the end of the decade, is inspiring all kinds of financial creativity. There is traditional equity and debt, but also leases, backstop “residual value guarantees” and purchase commitments.

Much of this does not appear on the primary financial statements of companies taking final responsibility for projects. Investors aren’t totally oblivious to this. Oracle has $260bn in off-balance sheet obligations; its shares are down 55 per cent in the last year. Add in other so-called hyperscalers Meta Platforms, Alphabet, Microsoft and Amazon, and Moody’s reckons combined off-balance sheet obligations have soared from $350bn in 2023 to $2.8tn today.

Everyone tends to claim that the risk they face is well under control, and mostly, data centre debt achieves investment-grade ratings. Data centre builders tout decades-long contracts from companies such as OpenAI, Anthropic, SoftBank or Nvidia. Those companies, in turn, boast vast access to capital; Microsoft, Alphabet or Meta have huge commercial activities that throw off cash they can tap in case of crisis.

Anyone who has spent time studying US corporate law, though, knows that there is often a gap between perception and reality. The question isn’t who is right, but who has the best lawyers, the biggest budgets from which to pay them, and the determination to battle it out to the bitter end.

For those sitting across the table from trillion-dollar tech groups, this could go either way. The likes of Meta and Microsoft may have an incentive, if their projects don’t go to plan and there is a temporary shortfall, to simply pay and make the problem go away. Or they might choose to throw their weight around.

It’s not clear where Oracle sits on that continuum — at $423bn market cap, Larry Ellison’s company is midsized by tech standards. But legal ambiguity is another ingredient that investors should add to their valuation recipe. It seems that realisation may not have dawned until now.

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