Investing in Data Centers - Highlights

So, good afternoon everyone. My name is Amayo. I am a partner at the Vipers in New York. Today, we turn to one of the fastest-growing frontiers of, uh, digital infrastructure in Brazil: data centers. And as the country cements its position as Latin America's tech hub, uh, with demand for secure, high-capacity storage and processing exploding, uh, mainly driven by cloud, fintech, innovation, obviously AI, uh, and a booming digital consumer base, as we all know.

So, for investors, this presents tremendous opportunities. And thankfully, we have a stellar panel to help us unpack those opportunities today. Give us the lay of the land. Tell us about, uh, the areas, the sectors of growth in digital markets in Brazil that are driving the demand for data centers and, uh, and how, how do you see Brazil now shaping up to become, uh, this hub for data centers in Latin America? Looking at the, uh, uh, sort of the background, uh, uh, infrastructure that we have in, in the country and the markets demanding, uh, data centers.

Well, thank you so much, Amado, for, for this opportunity. I'd like to, before, uh, first and foremost, thank all the attendees, uh, here present. Data, the data center is, is, uh, in, in my view, must be, uh, uh, considered as a, as a, a central, uh, drive of Brazilian infrastructure, of Brazilian growth for the years to come. Uh, as you know, the, the Brazilian government has, has come together in different, uh, uh, uh, different ministries, uh, in order to contrive this, uh, new legislation aimed at fostering this, this segment, this industry, which is, uh, absolutely indispensable for any, now in Brazil, for any country's, uh, uh, growth perspectives. Uh, in, this says we just, uh, this year, we, uh, the Brazilian government, uh, kind of laying the groundwork for the upcoming and so sought-after Retata, right? That my colleagues here, so, uh, much more, uh, uh, uh, let's say, able to, to talk about, will certainly discuss this in depth. Uh, Redata is the, is the, the, the holy grail of this new, of this new legislation, right? Uh, but as, as the, like I said, to, to, to, to pave the way for the data and to speed up things, we, uh, the Brazilian government has added this, uh, uh, 137-25, uh, u, um, I forgot how to say, Media Provisional Measure.

Measure, right? Uh, that kind of gives a, gives us, gives the market, gives the industry a hint of what's coming, uh, to play. Uh, but, uh, in, in, in general terms, uh, in, and try to, to address your, your questions, uh, uh, uh, and, uh, data centers as the driving force of this new, you know, search by the Brazilian population, Brazilian society, to, to have access to the so-called digital technological autonomy or sovereignty. Uh, and, uh, and, uh, Redat will kind of consolidate this, uh, this purpose. Uh, but, uh, in the meantime, this, the current legislation, uh, gives incentives or, or encourages the installation of data centers in Brazil, ZPS, and the export processing areas, right? Uh, provided that these data centers, uh, are supplied with clean, renewable energy. So, this is a very important step in this, uh, in this effort by the Brazilian society as a whole to, uh, at the same time point out that we are, we are, we are in line with what the, the world is seeking in terms of technological progress, of, of speeding up things, rendering more efficient the, uh, you know, all, all the segments, ments of, of the economy, and at the same time doing that, and without, you know, losing sight of the environmental, uh, perspective of this, uh, of this breakthrough.

So, uh, in, in, in general terms, I would say that besides the, the, the cloud compute and, and AI, uh, kind of infrastructure, uh, that Brazil wants to, to, to, to foster in Brazil, uh, that Brazil wants to, to kind of, you know, um, uh, bring about with this, uh, these efforts recently. Uh, we have to, uh, bear in mind that also other areas like public safety, health, public health, uh, uh, agribusiness, they will all be, uh, kind of benefited by these, by these, uh, advances, by these investments in data centers. Know, it's a, it's a, you know, it's a, uh, all-out effort, uh, in order to get these, uh, uh, uh, uh, these investments, and the Brazil, Brazilian government will, of course, uh, uh, do whatever it takes in order to, to secure those investments.

Thanks, uh, Rodrigo. Uh, I, I wanted to ask Alici to talk a little bit about, uh, the market, how it's developing, who are the investors, how big the market is, both in Brazil and Latin America, and, uh, how you see growth in the coming years.

Thank you, Mel. Uh, first of all, thank you personally for the invitation to, to be here in the chamber. It's really good to see the, the efforts that we do, uh, and the committees are having results and working together. Again, thank you, ch, for the invitation. I believe it's, it's interesting to, to jump after points because as, M& advisor and investment guy, uh, I do see that data centers today is a kind of the, the gold rush of the century, right? So everyone is paying attention, not only in Brazil but worldwide. And I particularly see the data center eventually as the, the, the main, the main highway, but there are several sectors that benefit from it, uh, directly and indirectly. And so, if you think broadly, even in terms of education, technology, and the new ages, right, are going to, and they are not directly related to data centers. So, you have to think broader than that. Uh, it's interesting to see how is the development of, of the, the data center sector, uh, globally. Right? Today, we're talking about a sector that creates around more than 200 billion dollars per year. It's going to almost double in a 6, 7 years period with a compounded annual growth rate of around 15% globally. So, we are talking about today, almost two, uh, 12,000 data centers globally that are attracting, u, um, uh, the strategic players and the financial sponsors. Today, most of the, the companies do are backboned by, uh, private equities, they are invested in the sector. And you have to have in mind that's a se, that's not only technology, but it's also real estate, right? So, these are things that have to be put together when you talk about data centers. Uh, most of the traffic, of course, runs, uh, in the US, 50% of the data centers, uh, globally are based in US, followed by Germany and UK. And Latin America represents around 1.7% of this volume. It's expected to grow around 12% pay over the next five, six years and to be around 2.2, two, 2.3% in a 5, 26 year per. So, we are still, is small in Latin America, right? And Brazil represents with some 16, 160 data centers, 50% of the data centers in Latin America. And Ros represents 50% of the investments, right? So, if you see today, uh, in Brazil, we will have most part of the, the international players, a few transactions in the sector, uh, even in capital raising. It's going to talk a little bit about financing. We just had last year, uh, green bonds issue that was around 800, uh, million re, ice issuance. So, very, uh, on the ESG, uh, angle. Uh, and it's a sector that has some challenges in Brazil. I'm going to talk a little bit about that, but a lot of opportunities, right? Today, 60% of the traffic of Brazil runs in the US. Right? So, uh, Brazil and Chile may be the hubs for, um, for data centers in, in Latin America. These are kind of a big picture, right? I believe it's important to give some, some numbers. So, we know how representative is that. And this is going, as Rodrigo said, because of AI, right? Because of the innovation that companies are doing on connectivity. So, definitely Brazil has a, a good position in Latin America, but also geopolitically speaking, right? In terms of, uh, diversification of investments, to be a hub not only for the region but on the diversification of risk, right? Even in the momentum you live today in the world, and thinking that the data center does not be, to needs to be, right, in the US or in Europe or Asia, it can be in Latin America. And we are seeing a lot of investments, uh, in Brazil, in Brazil. Uh, I, I believe it's interesting to, to mention a few of the, the advantages, right, of having data centers, uh, in Brazil. Uh, Redat is definitely going to be a game changer, right, in terms of regulation. Uh, Brazil has a unique position in terms of energy and on the transition energy and green energy. More than 95% of our matrix of energy is green, right? So, there are some appeals that are connected with data and are important. But I would say there are other things that are, are relevant, not to mention the challenges yet, but the cost of land in Brazil is still not high, so there's opportunity on that for, for data centers. And again, data center is also a real estate advancement in my view. And, and, and again, I would say the cost of labor that is relevant in Brazil for, for any, any sector, sorry, is, is still low in Brazil. There, I believe there's a challenge in terms of education, right? And the, the, how we prepare engineers and technicians to stay in Brazil operating the, the sector. And then going back to my initial point, I believe it's interesting to see how other sectors are going to benefit on that, right? So, construction, all logistics, the whole energy infrastructure, right, is, I, I used to do a few projects for renewable energies, right? And it doesn't mean to have only the farm, the wind farm ready, you have to connect to the network. So, all these things are benefiting Brazil for getting better in place for that. So, I believe with that is, is a big angle about how Brazil is positioned globally in terms of, of the, the sector, how there are opportunities for growth, right? And then I come back with some challenges.

Thanks, uh, let's talk more specifically about one thing you mentioned, which is energy. Um, and I wanted to hear from Natalia, given, uh, the energy landscape in Brazil. Um, do you think we, we have, uh, we can, uh, ensure security of supply for large data center projects? And, uh, how, how do you see, uh, the demand, uh, for energy coming from data centers, meeting, uh, meeting that, uh, supply and, uh, in, in the years to come?

Good afternoon. I would like to start by thanking the chamber for the invitation. It's a pleasure to be here. And going straight to your question, Amado, I think the simple answer is yes. So, in Brazil, we, in the past, we suffered from over-reliance on hydropower. But since the last Russian crisis, we had in Brazil, our grid has expanded. So, now we have thermal, biomass, uh, solar, wind, some nuclear, and now you have any rationing crisis mitigated. As Alicia said, we are the leaders in renewable energy in Brazil. Uh, and we still have a lot of opportunity and potentiation for new investments. So, today, in Brazil, we have a problem with over-supply of energy that comes from the gold rush in which many companies obtain licenses and build capacity. But also, assuming that all the reports that we are seeing in terms of energy demand for data center-driven and AI-driven, uh, we still have a lot of opportunities in Brazil, especially, I would say, the southeast upward of Brazil, in which the, the graduation levels are much higher compared to other countries in the northern, uh, hemisphere. So, we have a lot of potential for solar, and we still have a lot of potential for wind, onshore wind, and we still have not even started to explore the offshore wind side as well. Uh, but it's not only in terms of resources that we need to talk about. So, Brazil needs to have institutional and regulatory framework allowing for that, for energy supply, execution of EPAs in Brazil. Uh, and after 20 years of development, I would say that we have finally a, a mature free energy market in Brazil, which is operating under the CCE, which is the Commercialization Chamber in Brazil. I say that this, uh, Commercialization Chamber in Brazil is a first-class institution, is institution of state and not government. So, this is very important because it assures that you're going to have, uh, policies and regulatory framework, uh, despite of political cycles that you may have in Brazil. Uh, and also signing PPAs in Brazil for 15 to 20 years is common place, and this allows for financing, both in BRL and, uh, USD, as well. So, not a long time ago, in 2021, we had a new law enacted in which allowed for PPAs to be denominated in USD, as long as one of the parties is an exporter. So, this is very good in terms of financing. Uh, but in terms of, uh, supplying, uh, energy for those projects, I would say that self-supply models are the most common ones, is the main path. And basically, in Brazil, we have two models. I think it's important to understand these two different models. We have the model by equivalence and the lease model. Initially, we had a model that was sidelined because the consumer would construct the plant, the energy plants, but the problem that we had is that you were mixing the core business with the energy project. So, in terms of risk allocation, in terms of bankability, it was very difficult, uh, to put in place. So, now we have the model by equivalence. It is starting 27. It is booming since 2015 from now until now. And in this model, basically, the energy-intensive company, the core business, is going to be a shareholder in the generation business, either directly or indirectly, and they are going to buy energy from, uh, the company in which they invest. So, they are going to sign a PPA. You still have the PPA between the companies, and in terms of risk allocation, you're going to see a segregation between, uh, the core business and the risk associated with the energy that's going to be allocated in the SPV for this purpose. In terms of cost advantages, the self-supply is very interesting because you have the exemption for certain fees to access the system. Uh, so, it makes the cost of price much more competitive. And in terms of bankability, it's a model straightforward. The revenue is still come from PPA. So, it's straightforward, well accepted by banks, including Brazilian developed banks. When you go to the lease model, the other one is a more recent model that we are seeing. Uh, and in this model, actually, the developer is going to finance and build the plant. Then they are going to lease the plant to the producer. So, the producer is going to pay for the availability of the plant, and the producer is going to, uh, have some risk related to fluctuation of energy generation. Um, in terms of cost efficiency, still have the exemption, uh, certain fees related to access to the system. And another advantage that you have in this model is that you have the exemption from tax on goods and services as well. So, that's why we are seeing more this model as well.

Bruno, so can you tell us what you think the, uh, the challenges are to get that new legislation, uh, implemented and, and whether it will, from, from the private sector perspective, whether that will really bring, uh, meaningful, uh, relief for investors and make data centers attractive in Brazil?

Well, first of all, thank you everyone for being here. It's a pleasure to speak on this very relevant topic for our country. Thank you to the chambers, Amadil, for organizing this. Uh, taxes, I mean, in everywhere in the world, it's tricky. And making large investments in any country, uh, needs and requires certain, uh, aspects to be dealt with regarding taxes. Just before tackling the, the question you posed, uh, specifically, Amad, I mean, what is the actual problem that data centers face in Brazil in relation to taxes? Uh, as, as you know, and as it's very obvious that these are very large infrastructure projects that require a lot of capital investment upfront. So, if you have taxes, uh, being owed on the purchase of these capital investments that you need to make, this makes your capital investment necessity to go much higher. Today, this is about 50%. I mean, if nothing is done in our legislation today, whenever a certain player, uh, has an investment to be made in the data center sector, he will basically end up paying 50% in taxes upfront, just from purchasing services, construction services, uh, uh, materials, equipment, and everything. So, in every other major infrastructure sector in Brazil, such as railroads, airports, concessions, there are specific, uh, programs already issued by the government a long time ago, such as the Hiji Hippo and a lot more that exempt or reduce that capital investment tax a lot. So, data centers need a similar program, which is the Hata program. So, this is, I mean, this is going to certainly help a lot, uh, for Brazil to become even more attractive to these investments. The Hadata program, which, by the way, I don't know if everyone knows this, but the cost of reducing taxes for that specific program, the Hadata, which is applicable to data centers, has been, uh, put in the legislation, the new budget legislation that was sent, uh, by the government like later this week or last week. So, that the cost of reducing taxes on that part, assumably, is already in the budget calculations that are making, which is a very positive thing. I mean, this is a condition for it to be approved. So, it's, it's a, it's a very important step. Uh, so, so, if that is approved, we will have the same playing field that all other infrastructure investments in Brazil have, except for a very important component of the tax cost from this capex investment, which is the ICMS. And then we have, we have been seeing movements from several states in Brazil to also put forth programs that reduce or exempt the capital investments from ICMS, and also in some cases for energy, because energy in Brazil is taxed by ICMS, which, which basically is a state VAT type tax. So, given all of this, I mean, we've seen programs similar to this. This is very much on the Congress's agenda. It has been put in the budget legislation. However, it involves cutting taxes, and that is a big concern for any government anywhere in the world, because you need to show how you're going to, you know, give back that money in some other way. And what, what the government believes, and what I also believe, is that new investments and fostering the, the sector in Brazil is going to offset this tax exemption that's going to be made. But we do have other discussions relating to tax in the Congress right now, which is the final approval of the tax reform, which has been just sent yesterday. We have taxes on dividends, which is also on the agenda and has some bill of laws on that. And we have another project that aims to reduce other benefits for companies that is also being discussed. So, we have kind of a turmoil in terms of tax discussions within our Congress. Uh, I do feel that we have a positive scenario for the Redata to get approved. This, if that happens, it will basically take care of the problem up to when the provisional no measure, which is the legal instrument that they would issue for this, is valid, unless it's embedded some some way in the AI bill of law, which then is a more macro, but this would basically solve the problem for the coming two years, let's put it like this, in, in regards the federal taxes, the ICMS, then we need to look at each state specifically to see if they replicate that program internally. Um, and then when that expires, or I mean, when the, the tax reform actually comes into play, which starts roughly around 2027, and then moves on up to 2033, then we have a new design in the tax legislation, the general tax legislation, that already, uh, uh, provides a general, uh, exemption, or in other words, a full credit for any capital investment. So, ideally, we would have Redata coming into play right around this month. This would solve the problem for mostly two years, and then we would start seeing the problem being solved by the new tax reform design that allows a full credit for capital investments.

In Brazil. What we are seeing right now is more on the corporate financing side. I would say it's corporate secured issuance of the debentures in Brazil. Uh, is more of, I would say, it's both for greenfield or brownfield projects, is more of a portfolio financing, not specific for one project. And in terms of security package, what you're going to see is pledge of quotas or shares of the holding company or the SPV. You also going to have the share pledge of the equipment, sometimes the real estate. You, in the majority of cases, you're going to see corporate guarantee as well. And you're going to see an assignment of the accounts in which the receivables from the client are going to be deposited. This is because in this sector, there is a particularity in which, typically, the offtake with the clients does not allow the assignment of receivables directly. So, you need to take the account. Uh, but now that we are seeing larger scale projects, as you mentioned, Day One, for example, in, in one CPE and others that we are seeing in Brazil, we are seeing more and more discussion and moving towards a project finance, uh, format of financing, in which the cash flows, the project assets are going to be granted as collateral, and you're going to have limited recourse to sponsors. And I think there are two points that are interesting to think about when we are talking about project finance. One of them is not typical to all the industries, but is specific import, specifically important to data centers, that relates to capacity growth. So, when you're negotiating these arrangements and designing the project financing, it's important to think that this is a sector in which you always need to be thinking about capacity growth for demand. Even if you have new equipment, you need, uh, to increase, uh, uh, supply, or if you want to build projects in the big city, you have to have these flexibilities built in the documentation. Another thing that we see in some cases as well, outside Brazil, Europe, and United States, is the use of quiet enjoyment and direct agreements when possible, in which you basically have an agreement between lenders and the consumer, the client, directly. This agreement, uh, works for allowing the consumer to access the, the data center without any disturbance, but at the same time, grants the lender the right to enforce and even transfer, in case of enforcement, to a third party, a permitted third party, without giving cause to termination of the contract with the client. So, these are two topics I think are interesting to, to see and understand in relation to project finance in Brazil. But when we talk about cost of capital and, and, and, and what we have in Brazil in terms of financing in Brazil, I think there are few takeaways that are interesting to know. In Brazil, we have the incentivized debenture, which is widely used for, in the infrastructure sector. This means that, uh, it grants to the investor a 0% withholding tax on returns. So, this is a benefit. Uh, a lot of infrastructure sector issued debentures because of that, and you need to be a priority project in order to do so, and data center, as of now, is a priority project and needs to keep, uh, as a priority project to, to attract investments. Also, we have a new development in 2024, a new framework that created the international bond. So, the international bonds, the way that is equivalent to incentivized debentures, but grants these tax benefits for, for loans, uh, abroad that you, uh, going to get abroad by means of issuing securities, can be public offerings, can be private placements as well. And the beauty of it is that the company in Brazil can issue, can c, can, uh, raise money directly outside Brazil, instead of the old ways in which you need to have an offshore company established abroad, and you have a whole internalization process. In terms of lines of credit that we have in Brazil, in Brazil, we have sustainably thinking on the sustainable side. We have the B, the Brazilian Development Bank has a line, is a fund, Clea, the Climate Fund in Brazil, which is expected to receive a lot of, uh, uh, resources in 2026. And in terms of rates, we are seeing rates between 1% to 8%, well below the basic interest rate in Brazil, which is 15%. Uh, renewable projects are, uh, one of the cases that can apply for these type of sources. They are going to be on the top tier, 8%, but registration projects, for example, which is one second that in Brazil, we are seeing a lot of movement from the tech tech companies, they are super interested in that, is more on the lower tier, with 1%, but having said that, Brazilian Development, for example, does not have an specific line for data centers yet. So, I think this is an interesting discussion that we should have in case we really want to, uh, attract investments and, and, and ferment the digital sector in Brazil.

Thank you. So, with that, I wanted to thank, uh, Rodrigo, Natalia, Desendri, Bruno, for this wonderful discussion, and especially our audience for coming here today and, uh, taking part in this program. Thank you so much to the chamber. And [Applause]