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Deutsche Bank is exploring ways to hedge its exposure to data centres after extending billions of dollars in debt to the sector to keep up with demand for artificial intelligence and cloud computing.
Executives inside the bank have discussed ways to manage its exposure to the booming industry as so-called hyperscalers pour hundreds of billions of dollars into building infrastructure for their AI needs that is increasingly funded by debt.
The German lender is looking at options including shorting a basket of AI-related stocks that would help mitigate downside risk by betting against companies in the sector. It is also considering buying default protection on some of the debt using derivatives through a transaction known as synthetic risk transfer (SRT).
Deutsche declined to comment.
Deutsche’s investment banking business has “bet big” on data centre financing, according to one senior executive.
However, the scale of expenditure on AI infrastructure has prompted concerns that a bubble is forming with some likening the enthusiasm to that which preceded the dotcom crash.
Sceptics have pointed out that billions of dollars have been deployed in an untested industry with assets that quickly depreciate in value due to the rapid change in technology.
Deutsche has lent predominantly to businesses that service hyperscalers such as Alphabet, Microsoft and Amazon, and the debt is secured against long term contracts that promise steady returns, according to two people familiar with the bank.
In recent months Deutsche has provided debt financing to Swedish group EcoDataCenter as well as the Canadian company 5C, who together raised more than $1bn to fuel their expansion. The investment bank does not break down how much money it has lent to the sector but it is estimated to be in the billions of dollars.
Hedging exposure to the industry could prove difficult because betting against a basket of AI-related stocks in a booming market will be expensive. Meanwhile, SRT transactions require a diversified pool of loans to earn a rating and investors are likely to demand higher premiums to insure against defaults.
Hyperscalers’ pursuit of superintelligence has fuelled demand for infrastructure that will help them build it — with cost estimates between now and the end of the decade reaching $3tn — as well as businesses that service them.
Europe is expecting a wave of dealmaking and consolidation in digital infrastructure as companies move at breakneck speed to acquire and develop sites.
The Financial Times reported in September that Deutsche Bank’s asset management arm DWS was preparing the sale of its data centre business at a valuation they hope will reach €2bn.
Deutsche analysts said in late September that concerns were overplayed, after using AI to analyse how many mentions of an AI bubble there were in English language publications since the start of the year. They concluded: “One AI bubble has already burst — the bubble in saying there’s a bubble.”
