7% Yield Tied to Microsoft! $8 Billion Floods into AI Data Center Bonds

Demand for Microsoft (MSFT-US)-linked 'Project Odyssey' data center bonds is surging, with subscriptions surpassing $8 billion, potentially increasing the issuance size by around $1 billion to $3.9 billion, reflecting how high yields close to junk-bond levels are successfully attracting investors.

According to sources, the bonds will be issued through subsidiaries of QTS Realty Trust, a data center operator backed by Blackstone (BX-US), with proceeds funding a data center project in Georgia. After several days of investor roadshows, demand has exceeded twice the originally planned issuance size, creating room to expand the deal.

The bonds are expected to carry a coupon rate in the high 6% range and will be issued at a discount, pushing the effective yield into the low-to-mid 7% range. Although the bonds are expected to receive investment-grade ratings, their yield is close to current trading levels for single-B rated junk bonds.

The deal could hit the market as early as Tuesday, but discussions are ongoing, and the size and terms may change. Citigroup (C-US), Goldman Sachs (GS-US), JPMorgan Chase (JPM-US), and Morgan Stanley (MS-US) held investor calls last week. The bonds are expected to be issued by two special-purpose subsidiaries of QualityTech, a unit of QTS. The banks declined to comment, while QTS and Microsoft did not respond immediately.

Tech giants including Alphabet (GOOGL-US) and Amazon (AMZN-US) have flooded into the bond market this year to expand AI infrastructure. These hyperscale cloud providers are also helping smaller players like QTS issue multi-billion-dollar bonds by signing long-term leases and even providing financial support for data centers.

However, after initial investor rush for AI-related bonds, demand has recently shown signs of fatigue, forcing issuers to offer more favorable pricing and adjust financing strategies.

A subsidiary of QualityTech issued $4.6 billion in investment-grade bonds in April to fund computing capacity for Microsoft, with peak subscription demand reaching about $12.5 billion. Goldman Sachs had previously gauged market interest in another potential $5.4 billion bond and loan financing package to support QTS’s Microsoft-linked data center development in Georgia.