Is AI Data Center Debt the Next Subprime?

Bonds tied to Meta's largest AI data center traded at 91 cents on the dollar on September 28, pushing their yield to about 7.55%, according to a Reuters column. That left the spread over Treasuries near 230 basis points, wider than the 185 the bonds paid at launch last fall but short of the record 255 they reached in July.

The notes were sold by Beignet Investor, the vehicle that financed Hyperion, Meta's 5-gigawatt campus in Richland Parish, Louisiana. The $27 billion offering was the largest private bond deal ever, and S&P rated it A+, the kind of grade pension funds and insurance companies are set up to buy.

The same week, the price of insuring Meta's debt against default rose to nearly 100 basis points, above its July high, and most Big Tech credit default swaps were trading at record levels. Oracle, meanwhile, issued a force majeure notice warning that a data center it's building in New Mexico could be delayed by up to a year because it can't secure enough power.

For most of this year, critics have argued that AI data center debt is this cycle's subprime. Ed Zitron has made the case repeatedly, and TechRadar ran a piece warning of a possible "subprime data center crisis." The argument is that speculative construction debt is being packaged and sold to pensions, endowments and insurers that can't see what they own. Some of that holds up. Some of it, at least for now, doesn't.

How Hyperion's debt ends up in a pension

Meta could have borrowed for Hyperion on its own balance sheet. Instead it kept a 20% stake in a joint venture and let funds managed by Blue Owl Capital own the other 80%, NPR reported. Because Meta is the minority partner, the debt sits with the venture and stays off Meta's books.

Meta pays rent as the tenant, and the rent services the bonds. PIMCO funds took a large piece of the deal, Bespoke Investment Group noted, and BlackRock was among the biggest buyers. Those firms manage money for state pension systems, insurers and university endowments, which is how a loan on a Louisiana server farm can end up in a teacher's retirement plan.

Investors were paid extra for the arrangement. The notes carry a 6.58% coupon, compared with about 5.5% on Meta's own comparable corporate bonds, and their A+ rating sits one notch below Meta's AA-, according to Marcellus Investment Managers. Meta's second deal of this kind, for a campus in El Paso, Texas, priced above 7% this summer, about 0.4 percentage points more than Hyperion, European Business Magazine reported.

Data center bonds went mainstream fast

Hyperion is the biggest example of a much larger market. Operators issued $26 billion of data center asset-backed securities and commercial mortgage-backed securities in 2025, more than 10 times the 2020 total, Impax Asset Management said. ABS issuance alone reached $38.4 billion in the first eight months of this year, up from $24.1 billion a year earlier, according to Datacentres.com.

The structure is simple. An operator pools leases on its buildings, splits the cash flow into slices, gets the top slices rated A or AAA and sells them. Pension funds and insurers that need long-dated income have been some of the most active buyers, DataBank CFO Kevin Ooley told Institutional Investor.

Private credit is growing alongside the bond market. Bloomberg estimates there is more than $500 billion of AI data center debt outstanding, about $200 billion of it held by private credit funds, TechRadar reported. Morgan Stanley expects private credit to supply more than half of the $1.5 trillion the buildout needs through 2028, and Mercer has warned UK pension trustees that their AI exposure is moving from their stock holdings into their bond portfolios.

The exposure is real, though often small relative to the whole. CalPERS, the largest US public pension, has about 4% of its roughly $615 billion in private debt and is targeting 8%, CEO Marcie Frost told Bloomberg TV in February. University endowments are big private credit investors too, but there is little public, deal-level data showing how much data center debt they hold.

The parts that look like 2008

The resemblance is in how the deals are built. Before the financial crisis, banks moved mortgage risk into off-balance-sheet vehicles. Tech companies are doing something similar with joint ventures and special purpose vehicles, and Morgan Stanley puts the total of financing and leasing arrangements that Nvidia, Broadcom and the hyperscalers keep off their balance sheets at about $3 trillion, according to the Reuters column.

Ratings are doing a lot of the work, as they did then. Beignet's A+ rests mainly on Meta's role as tenant and guarantor, and S&P cautioned at issuance that substantial credit risk could flow back to Meta during construction and once the campus is running. Insurers and pension funds often look specifically for single-A debt, Creditflux reported. A highly rated bond that pays a premium is exactly what their investment rules reward.

The risk is also more concentrated than it looks. A small number of tenants sit behind a large share of the deals, and their lease terms are mostly private. The same investor can own a hyperscaler's bonds, a loan to the developer building its data center and securities backed by its leases, Remio noted. Those positions look diversified on a spreadsheet and would lose value together if that tenant pulled back.

The parts that don't

The collateral is much better than it was in 2006. Subprime loans often went to borrowers who couldn't afford them from the start. Most data center ABS is backed by finished, operating buildings leased to some of the most creditworthy companies in the world.

Leverage is lower, too. Bespoke looked at the 26 data center ABS deals priced in 2025 and found a weighted average loan-to-value only slightly above 50%. With that much equity cushion and steady rent coming in, the firm argued, the bonds could take a large drop in demand without defaulting. It also found the market was two orders of magnitude smaller than investment-grade corporate bond issuance. By 2006, subprime loans made up roughly a fifth of all new US mortgages.

And so far there's no second layer of leverage. The 2008 crisis spread because mortgage bonds were repackaged into collateralized debt obligations, then into CDOs of CDOs, and insured with credit default swaps that AIG couldn't pay out. Nothing like that has been reported in data center debt.

Even the Reuters column that flagged the Hyperion selloff said Meta and its peers are very unlikely to default. S&P director Dhaval Shah told NPR he considers Hyperion a good deal. If Meta doesn't renew its lease, Blue Owl would sell the campus and use the proceeds to repay bondholders before it gets paid itself.

Where the risk is building

"Speculative" is a hard label to put on a AAA bond backed by a leased, running building. It fits better earlier in the process, before the building is finished and before a tenant has moved in.

That stage is increasingly funded by private credit. Direct lenders now dominate construction and bridge loans for data center developers, and on the strongest hyperscaler-backed projects they are pushing loan-to-cost ratios toward 70%, Datacentres.com reported. One academic analysis estimated that Hyperion was about 90% debt-financed at the project level. Those loans don't trade on an exchange and aren't priced every day, and they sit in funds that pensions and insurers own.

The lease terms add another layer of risk. Hyperion's bonds don't mature until 2049, but Meta can decide every four years whether to renew its lease, according to NPR. If it walks away, the backstop is selling a single-purpose campus in rural Louisiana. AI data centers are also designed around a specific chip generation, cooling system and power density, so a building financed over 20 years could be technologically out of date well before the debt is repaid.

Then there's the question of whether AI earns enough to pay for all of this. Goldman Sachs estimates hyperscalers need around $300 billion a year in AI revenue just to break even on their spending, and Oxford Economics has said the returns investors expect would require those companies to capture most of the GDP gains AI is projected to create, according to the Reuters column. Hyperscalers have borrowed about $250 billion this year, Treasury yields are at their highest since before the financial crisis, and the Federal Reserve has started raising rates. The Bank of England warned in July that AI companies' use of outside debt had accelerated sharply in the first half of 2026.

What it means for companies buying AI

Most enterprises aren't buying data center bonds, but many are signing multi-year contracts for compute and colocation with providers whose buildings are financed this way. A provider paying for growth out of its own profits is a different counterparty from one whose next campus depends on a construction loan and a bond sale that hasn't happened yet. We raised the same vendor question in our coverage of Bank of America's AI bust warning last week.

There's a second exposure that's easy to miss. Companies that still run defined benefit pension plans may already own this debt through their plan's credit managers. Mercer is telling trustees to look at AI concentration across the whole portfolio, not just the equity side.

What to watch

The market is already charging more for the risk. The Hyperion spread has widened, Meta paid more for El Paso than for Louisiana, and default insurance on Big Tech debt is at record levels. None of that amounts to a crisis yet.

The clearer test will come in the safest part of the market. AAA data center ABS still prices tighter than comparable commercial mortgage bonds, and Datacentres.com said that if those spreads widen by even 20 to 30 basis points ahead of the 2028 to 2030 refinancing wall, it would be the first hard sign that investors are repricing AI infrastructure risk rather than chasing yield.

For now, the subprime comparison describes the financing better than the assets. The senior bonds are backed by real buildings, real leases and modest leverage. The construction loans held in private credit funds are harder to see and harder to value, and they're the part of this market most likely to surprise the pensions and insurers that hold them.