Applied Digital Corp. has successfully persuaded bond investors to commit $2.35 billion for the development of an AI data center in Ellendale, North Dakota, a location that remains largely off the radar for most. This ambitious financing venture comes in the form of senior secured notes with a 9.25% interest rate, priced attractively at 97 cents on the dollar, yielding around 10% for early investors.
The substantial investment is backed by long-term lease agreements with CoreWeave, a key player in the AI cloud computing sector. These contracts are expected to generate between $5 billion and $11 billion in revenue over their 15-year duration, providing a strong case for potential returns. The senior secured notes will mature in 2030, with funds earmarked specifically for constructing high-performance computing facilities at the Polaris Forge 1 campus.
CoreWeave has increased its contracted capacity from an initial 250 MW to 400 MW at the site, positioning itself as the anchor tenant for this new facility. While this partnership is a significant advantage, it also introduces what analysts refer to as "concentration risk," as most of the revenue depends on a single customer.
Despite the risks associated with such a concentrated revenue stream and the bonds being rated as junk, the attractive yield on the secured debt stands out in today’s market. Investors are drawn to the potential cash flow from CoreWeave’s operations, which, if realized, could comfortably cover the debt obligations within five years before maturity. The initial discount at issuance also encourages interest from buyers, providing a buffer for the associated risks.
As Applied Digital continues to establish itself in AI infrastructure, the decision to build and operate data centers tailored for high-performance computing reflects the growing demand for such facilities. This strategy positions them as a key player in the ongoing AI boom, with CoreWeave as a major client.
Looking ahead, successfully executing this project could solidify Applied Digital's position in the AI data center market and set a precedent for future investments in AI infrastructure. As reliance on AI technology increases, so will the demand for stable data centers capable of supporting advanced cloud computing needs, making this bond offering a critical step in addressing that challenge.
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