One of the most ironic aspects of this market is the vast gap between the types of insurance the credit market is willing to offer and the types of risks the property insurance market is willing to cover. Currently, the cost of providing comprehensive insurance for these data center campuses is prohibitively high.
Meta and BlackRock's $14 billion El Paso project only had a few hundred million dollars in insurance coverage, and this coverage was not for all losses, let alone comprehensive coverage. Given the sheer size of the project, in the event of massive losses, insurance payouts might be far from sufficient to cover the actual damage.
For example, in the worst-case scenario of a fire destroying an entire data center campus, insurance payouts would be limited to approximately $450 million, equivalent to only 3% of the project's total value. Losses exceeding this amount would be entirely borne by the lenders.
The collateral these lenders obtained actually relied on Meta's rental payments, not the buildings themselves.
The insurance industry similarly believes that this type of risk is too large to be underwritten as a simple property and liability risk. Therefore, when these assets reach investment-grade bond rating standards, the entire risk is effectively transferred to bond investors.
In the worst-case scenario of a fire, tenants would bear the costs of facility damage and relocation. Investors, however, argue that they are protected by the building's rental income, and that they have no direct claim to the building itself, with insurance coverage only reaching 3% of its value.
