Toronto-Dominion Bank

is weighing a rare type of significant risk transfer to hedge current and future data centre exposure as tech companies ramp up

artificial intelligence

investment.

The initial size of the reference portfolio is around US$1 billion, according to people familiar with the matter. The potential transaction would include a forward-flow arrangement, which allows the bank to increase the size of the SRT over time, said the people, who asked not to be identified because the matter is private.

The bank would be able to include data center debt it originates over a set period, rather than in a one-off transaction. The tentative deal is at an early stage and its terms may change significantly during the issuance process, the people said.

Toronto-Dominion Bank joins lenders such as Societe Generale SA and Morgan Stanley in exploring risk transfers to hedge data center financing, as AI infrastructure investment gathers pace. Four of the biggest U.S. technology companies have earmarked about US$650 billion of capital spending this year for new data centres and related equipment.

A representative for the Toronto-Dominion Bank declined to comment.

Banks use SRTs to manage risk or free up capital, giving them more room for new lending, acquisitions or shareholder payouts. They act as insurance against default, and typically cover between five per cent and 15 per cent of the value of a loan or portfolio of loans.

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Canadian banks, including

Bank of Montreal

, have been selling SRTs as a way to increase their capital cushion.

With assistance from Neil Callanan.

Bloomberg.com