Explore a cross-section of up-to-date on the trends shaping the future
KEEP UP TO DATE WITH ARC’S MOST COMPELLING INSIGHTS ON ISSUES SHAPING THE FUTURE OF BUSINESS AND SOCIETY
DATA CENTRE CASH FLOWS: OBSOLESCENCE MATTERS Accurately analysing the factors that influence the revenues of a data centre securitisation is crucial to determining debt serviceability and liquidation values for refinancing or repayment. As a result, ARC has constructed a robust methodological framework for data centre net cashflow analysis that accounts for risks such as those outlined in ARC’s previous research report.[1] This case study explores the practical implementation of ARC’s cashflow framework by considering a hypothetical colocation data centre, tested at different rating levels and with varying degrees of obsolescence risk proxied by ARC’s Obsolescence Score.[2] Key FIndings A Low-Risk data centre achieved an average debt service coverage ratio (DSCR) of 1.9x in an A rating scenario over a 5-year interest-only period. Under the same conditions, a High-Risk facility averaged 1.7x, suggesting a higher likelihood of liquidity trigger breaches that may cause early or scheduled amortisation. In ARC’s test case, a High-Risk data centre achieved a c.35% lower property valuation than a Low-Risk data centre in an A rating scenario, highlighting the impact of obsolescence on expected debt servicing or refinancing capacity. Conversely, holding obsolescence constant at Low-Risk, a c.13% higher LTV at A versus BBB showed the importance of rating-specific stresses. Higher obsolescence risk reduces marketability and increases rollover risk, in terms of; achievable lease rates, contract (re-)negotiation periods and terms. As a result, a High-Risk facility generated approximately 24% less revenue than a Low-Risk centre due to lease renewal stresses in ARC’s test case.
LEARN MORE
September 15, 2025
The surge in data centre investments in Iberia is generating a ripple effect across the energy infrastructure, especially in electricity generation and grid expansion. For Iberian Engineering, Procurement and Construction (“EPC”) contractors focused on power systems, this translates into a significant pipeline of projects related to renewable energy deployment, transmission capacity upgrades, and substation development. While this offers strong business visibility for the coming decade, execution risks are mounting. Rising input costs, tight labour markets, and supply chain disruptions are challenging contractors’ ability to deliver projects on time and within budget.
LEARN MORE
September 15, 2025
SCOPE OF THE CASE STUDY This case study illustrates the practical application of ARC Ratings’ recently published draft corporate credit rating methodology[1] (Draft Corporate Methodology) by using a hypothetical company, “ComTechno[2]”. KEY POINTS The objective is to demonstrate how various components of the rating framework—such as industry risk, entity risk, financial risk, peer comparison, modifiers, and recovery—interact within a structured analytical process. The report showcases a format and structure similar to that of a Corporate Issuer rating report prepared under the new methodology. It includes the derivation of an Issuer Credit Rating (ICR), the role of peer comparison, and an illustrative instrument rating—each supported by analytical rationale and key rating drivers. It is intended to guide market participants, issuers, and other stakeholders through each step of the analytical process, explaining how qualitative and quantitative factors are evaluated, weighted, and synthesised. By presenting a structured application of ARC Ratings’ corporate methodology, the report offers a transparent view of how the framework is implemented in practice, the types of information typically considered, and how professional judgement is integrated alongside financial metrics—enhancing both understanding and replicability across sectors and corporate profiles. The analysis focuses on a small-sized, UK-based entity operating in the technology sector. This sector was selected due to its dynamic growth potential, reliance on continuous development, challenges around talent retention, and the strategic importance of innovation and scalability in shaping credit profiles. It also introduces a diverse range of analytical considerations—from funding needs and revenue volatility to competitive positioning and operational leverage—highlighting the flexibility and nuance of the methodology. [1] Note: This is a new methodology, published on 4 July 2025, proposed to replace the previous version issued in July 2024. The draft will be subject to public consultation until 4 August 2025. Throughout this report, references to ‘the methodology’ refer to the proposed version unless stated otherwise. [2] Please note that the name of the hypothetical company and the data presented herein do not relate to any actual company. Any resemblance to real entities is purely coincidental.
LEARN MORE
September 15, 2025
PUBLIC PROCUREMENT CLAIMS: A DISTRESSED DEBT GOLDMINE? Public Procurement Claims (PPCs) have emerged as a new asset in the non-performing market. Transforming public sector receivables into tradeable securities offers a strategic approach to alleviate delayed payments from Public Entities (PE), simultaneously enhancing liquidity and financial stability. Key Points Unlocking New Investment Opportunities: PPC securitisation creates an alternative investment class with relatively low correlation to traditional financial markets. Since public sector entities back these receivables, they attract institutional investors looking for stable, government-supported returns. Enhancing Liquidity and Reducing Credit Risk: The sale of receivables to an SPV provides contractors with immediate liquidity rather than waiting for delayed public sector payments, thus mitigating credit risk. Furthermore, it assists public entities in managing budgets without immediate liquidity constraints. This injection of liquidity not only stabilises contractors’ financial positions but also enables them to invest in new projects, support employment, and stimulate broader economic activity. Securitisation process: Securitisation transforms government contract receivables into tradeable securities. A financial institution pools these claims into a Special Purpose Vehicle (SPV), which issues asset-backed securities (ABS) to investors. Challenges and Legal Considerations: This securitisation process may need to overcome complex legal requirements, evaluate the creditworthiness of assets, and address regulatory challenges. Hence, its success will rely on transparent practices, legally enforceable claims, and the existence of a robust secondary market to provide liquidity for investors. Location: Southern Europe is in an early adoption phase of PPC securitisation solutions. Italy appears to be the most advanced market in this space, having established both regulatory frameworks and market practices. In contrast, the rest of Europe, where experience and regulation for this particular sub-asset class are still evolving, has an opportunity to strengthen its regulatory frameworks and further integrate these assets into national financial systems. Impact on the NPL Market: PPC securitisation can serve as a strategic tool to reduce the buildup of non-performing loans, particularly in sectors impacted by delayed government payments. As an emerging sub-asset class, it might have the potential to support further evolution of the NPL market.
LEARN MORE
September 15, 2025
CRE FINANCE OVER AN EXTENDED HORIZON A standard Commercial Ground Rent (CGR) in the UK (United Kingdom) is a type of Commercial Real Estate (CRE) transaction involving the sale of a Property, which includes the building and land, at a steep discount to an investor—the freehold interest[1]—with an attached agreement that it will be leased back to the seller—the leasehold interest1—through a Ground Lease Agreement (GLA)[2]. This gives the leaseholder, the lessee within the framework of the GLA, the right to develop, build, occupy, and operate on the land for a specified period. This structure provides security to the investor by virtue of the freehold title to the Property, giving the landowner recourse against the land and buildings. This article compares CGR to a traditional sale and leaseback structure and traditional CRE finance, highlighting the primary considerations for CGR credit risk assessment. Key Points CGR offers an opportunity to invest in an asset with 30 or more years of stable cash flow. Due to the term length and reduced property price, the initial rent is agreed to be significantly lower than the prevailing market rent. It is usually a proportion of the lessee’s earnings before interest, tax, depreciation, and amortisation (EBITDA), with scheduled increases on an inflation-linked basis. The property sale at a discount presents an attractive Loan-To-Value (LTV), usually between 20% and 40%. Coupled with the notion that the leaseholder is not entitled to any excess amounts recovered upon the sale of the property, there is a significant incentive to ensure rental obligations are met to avoid losing the leasehold interest and the option to repurchase the property at maturity. Table 1: Overview: Key differences between CGR, sale and leaseback, and traditional CRE finance Credit risk associated with a CGR pertains to the leaseholder’s capacity to meet the rental obligations promptly, and the potential for investor losses following a default event that results in a property sale when a market value decline erodes the capital buffer. CGR exhibits increased risk and uncertainty regarding future Property valuations. However, low rent and the potential for long-term Property value growth mitigates some credit risk. Driven by real estate type and demand, the below-market rent boosts the chances of a new tenant assuming (being assigned) the payment obligation if the lessee’s financial position significantly deteriorates (nears default). Meanwhile, based on the term length and anticipated property value growth, the low repurchase cost in relation to the property value at maturity incentivises the lessee to fulfil all obligations. [1] Phoenix &Partners: In the UK, freehold pertains to property ownership that encompasses both the building and the land it occupies, whereas leasehold refers to ownership of the building for a specified term without ownership of the underlying land. [2] Linklaters: Unearthing Commercial Ground Rent Financing
LEARN MORE
September 15, 2025
Nesciunt qui dolore omnis consequuntur quod. Rerum sunt itaque quod. Maxime ad
Earum totam aut qui rerum id eos facere. Tenetur sit et consequatur ut porro nemo quidem. Praesentium inventore magni qui. Repudi
Labore vel recusandae quia ut beatae iste ratione. Ullam necessitatibus dolores tempore qui quis.
.jpg)
.jpg)
