Managing Credit Risk in Data Center Development

How trade credit insurance can support growth and financing.

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Strong infrastructure may power a data center, but the financial strength of tenants, suppliers and project partners can influence how a project is financed, delivered and valued over time.

Many organizations are expanding beyond traditional hyperscale tenants and working with emerging AI companies, specialized service providers and increasingly complex supply chains. These shifts are creating new considerations around counterparty credit risk, particularly when long-term lease payments, major equipment purchases or project financing depend on the financial performance of another organization.

Trade credit insurance and structured non-payment insurance can help organizations manage these exposures. While these solutions have been used for years in other industries, they are gaining attention in the data center sector as tools that can support financing strategies, protect cash flow and strengthen overall risk management.

Understanding the different types of credit insurance

Not all credit insurance solutions are designed to address the same risks.

Traditional trade credit insurance is commonly used to protect businesses against customer non-payment. Coverage is typically applied across a portfolio of receivables and may respond if a customer becomes insolvent or is unable to pay outstanding invoices. Organizations often use this type of insurance to help protect cash flow, reduce bad debt risk and support working capital management. For colocation providers with large customer portfolios, traditional trade credit insurance can provide valuable protection against unexpected customer defaults.

Structured non-payment insurance is designed for a different purpose. Rather than covering a broad portfolio of receivables, it's typically structured around a specific contract, lease, financing arrangement or counterparty. These policies are often tailored to match the duration of a long-term obligation and are frequently used to support financing transactions where lenders are evaluating the credit quality of the underlying revenue stream.

For data center developers and investors, structured non-payment insurance is often the more relevant solution when evaluating project financing. Providing a layer of protection around long-term payment obligations may help strengthen a transaction's credit profile and support broader access to capital. Traditional trade credit insurance, meanwhile, can play an important role in protecting operating revenues and managing customer credit exposures across a portfolio.

Four ways credit insurance can support data center growth

Credit insurance can support a wide range of strategic, financial and operational objectives across the data center lifecycle. From strengthening financing structures to protecting supplier deposits and supporting global expansion, organizations are using these solutions in several ways to help manage risk and create greater financial flexibility. The following examples highlight some of the most common applications in today's market.

1. Supporting financing for data center projects

One of the most common applications of structured non-payment insurance is supporting project finance, which is typically underpinned by a data center's power sourcing under its Power Purchase Agreement(s)(PPA). As electrical power is a data center's most critical variable expense component, the PPA is central to the economics of data center development.

Operators require reliable access to electricity, including renewable power and as such, many are entering into long-term PPAs or similar energy supply arrangements with utilities, independent power producers, renewable energy developers or intermediaries.

Although these agreements are expense-side commitments rather than revenue-generating assets, they can still influence financing analysis. Lenders and investors may evaluate whether a power supplier has the financial capacity, operating capability and irrevocable contractual commitment to perform over the life of the agreement. A failure to deliver power as agreed, or a material deterioration in the supplier's credit profile, could affect project economics, operating resilience and the perceived bankability of the development. Similarly, the credit quality of the data center itself as the power off-taker is key to the analysis, particularly since this structure positions the data center as the obligor under a credit insurance policy.

Structured credit or non-payment insurance may be relevant where a data center developer, owner or financing party has meaningful exposure to a power-related counterparty. Depending on the structure of the agreement, coverage may help address non-payment, non-performance or credit deterioration risks associated with key energy supply arrangements. This can be particularly important where access to power is a gating item for project delivery, tenant commitments or debt financing.

For this reason, PPAs should be considered alongside tenant leases, supplier deposits and other long-term contractual exposures when evaluating how credit insurance may support a data center's broader financing and risk management strategy.

The value isn't simply the insurance protection itself. The larger benefit is often the potential impact on access to capital, financing flexibility and overall transaction economics.

When considering these structures, several factors are particularly important:

The policy should be structured so lenders can benefit from the coverage if necessary
Coverage terms should align with the duration of the financing arrangement
Policy language should be carefully negotiated to support lender requirements and minimize potential disputes

Early collaboration among developers, lenders, brokers and insurers is often critical to achieving a successful outcome.

2. Protecting advance payments to suppliers

Data center developers are making substantial investments long before facilities become operational.

Critical equipment such as transformers, generators, switchgear, cooling systems and other power infrastructure often require significant deposits and lengthy lead times. In today's market, securing production capacity and delivery schedules frequently means committing capital months or even years in advance.

If a supplier becomes insolvent or is unable to deliver, those deposits may be difficult to recover. More importantly, project schedules can be disrupted, potentially creating downstream impacts on construction, tenant occupancy and revenue generation.

Advance payment insurance can help protect these deposits by covering losses associated with supplier insolvency or non-delivery. For organizations with significant capital committed across multiple vendors, this coverage can provide valuable balance sheet protection and support greater confidence in procurement strategies.

3. Managing credit risk across colocation portfolios

For colocation providers, credit risk often looks different.

Instead of a small number of large tenants, many operators maintain relationships with hundreds of customers. While diversification can reduce concentration risk, it can also create a broader portfolio of receivables that must be monitored and managed.

Traditional trade credit insurance may help protect against a pattern of customer defaults while also providing access to credit insights and monitoring services. For operators seeking to strengthen cash flow protection and support working capital management, this can be a practical and cost-effective solution.

4. Supporting international expansion

As data center development expands globally, organizations are increasingly evaluating opportunities in regions such as Asia-Pacific, Latin America, the Middle East and Africa.

Cross-border projects can introduce additional risks that differ from those encountered in domestic development. These may include government actions, currency controls, contract enforcement challenges or disruptions associated with political events.

Political risk insurance can complement trade credit solutions by providing protection against specific events such as expropriation, currency inconvertibility, political violence and certain government-related contract disputes.

For developers, investors and lenders pursuing international opportunities, these solutions can help support long-term investment decisions and provide greater confidence in unfamiliar markets.

Other considerations: The private equity and investor perspective

For investors and private equity sponsors, credit risk management can influence more than individual transactions.

The quality and stability of contracted revenue streams are often important considerations during acquisitions, refinancing events and portfolio valuations. Assets supported by credit enhancement strategies may provide additional comfort to lenders, investors and potential buyers during due diligence.

Credit insurance can also be used to address specific transactional objectives, including tenant concentration concerns, deferred payment arrangements or other contractual exposures that may affect enterprise value or financing flexibility.

The appropriate structure will depend on the organization's objectives and where credit-related constraints exist within the portfolio.

Considerations before moving forward

Like any risk management tool, credit insurance should be evaluated carefully. Organizations should recognize that:

Insurance capacity isn't unlimited, particularly for emerging industries and rapidly growing companies
Insurers rely on accurate and timely information during underwriting
Claims processes may involve waiting periods and documentation requirements
Coverage terms should align closely with the underlying contractual obligations
Insurance is most effective when supporting a fundamentally sound transaction and strong risk management practices

Credit insurance isn't a substitute for thorough due diligence. Rather, it's one of several tools that organizations can use to help manage risk and support strategic growth objectives.

Evaluating whether credit insurance fits your strategy

Organizations evaluating trade credit or non-payment insurance may benefit from considering a few key questions:

Is tenant or counterparty credit affecting financing options, borrowing capacity or project economics?
Are significant supplier deposits currently exposed to potential insolvency or non-delivery risks?
Could credit enhancement provide a more efficient solution than alternative financing or risk management approaches?
Are there portfolio concentration concerns that could be reduced through insurance-backed structures?

Credit risk is becoming an increasingly important component of development, financing and investment strategies. For organizations answering "yes" to any of these questions, a deeper evaluation may be worthwhile.

Whether evaluating tenant credit, protecting supplier deposits or exploring ways to support financing objectives, organizations may benefit from assessing how credit insurance fits within their broader risk management strategy. Gallagher's data center and credit insurance specialists can help evaluate potential exposures, identify available solutions and determine whether credit insurance aligns with your business objectives.