Why residual value is the hardest part of GPU credit
Every GPU deployment carries two risks that are easy to confuse. The first is whether the customer keeps paying under its contract. The second is what the hardware is worth when the contract ends, or if it ends early. The first can be analyzed like any other credit. The second depends on how quickly newer chips arrive, how deep the secondary market is and what the next customer will pay, and nobody can price it with the same confidence.
Senior lenders generally do not want the second risk. When it sits inside a single loan, one of two things happens. Either the loan is sized so conservatively that the residual value barely matters, leaving the operator to fund a large share of the cost with equity, or the whole loan is priced for a risk that only part of it carries. Separating residual value into its own instrument avoids both.
Separating the two risks
In a separated structure, the senior debt is sized so that the customer contract repays it in full within the contract term. The senior lender is then exposed mainly to the customer’s credit, with the hardware as security if something goes wrong. A second, smaller instrument, a residual value note, finances part of what would otherwise be sponsor equity, and is repaid from the hardware: from re-letting, selling or refinancing the GPUs at the end of the term, or from what the hardware realizes after the senior debt is repaid if the operator defaults.
Aircraft and equipment finance have separated lease cash flows from residual value for decades, because different investors are comfortable with each risk. The same logic applies to GPUs. The senior investor holds contract-backed paper. The residual value investor holds a higher-yielding position in the hardware and is paid for the uncertainty.
How a residual value note works
The note usually sits at the holding company that owns the project company, secured by a pledge of the project company’s shares rather than a second lien on the equipment. That keeps the senior lender’s security and documents clean and avoids a complex intercreditor arrangement.
While the deployment performs, the note is paid cash interest from the cash left after the senior debt has been serviced. If the senior coverage falls below an agreed level, that cash is trapped for the senior lender and the note’s interest waits. The note’s principal is repaid from the end-of-term event. To make that event reliable, the documents require a re-letting or sale process to begin six to nine months before the contract ends, set a deadline for completing it, and give the noteholder the right to run the process if the operator does not.
An illustrative structure
The example below splits a $250 million deployment into senior debt repaid by the contract, a residual value note repaid by the hardware, and sponsor equity. The end-of-term figures are assumptions chosen to show how coverage is measured, not a forecast of GPU values.
An illustrative example
| Deployment cost | $250 million |
| Senior debt, repaid by the contract over 36 months | $160 million |
| Residual value note, repaid by the hardware | $40 million |
| Sponsor equity, 20% | $50 million |
| Contract net cash after operating costs | $6.7 million a month |
| Senior debt service at an assumed 9% rate | $5.1 million a month |
| Cash after senior debt service, 1.31x coverage | $1.6 million a month |
| Note interest at an assumed 15% rate | $0.5 million a month |
| Assumed hardware value at month 36, 40% of cost | $100 million |
| Assumed realization after costs and discount, 75% | $75 million |
| Coverage of the $40 million note at the end of the term | 1.9x |
Illustrative only, with figures rounded. The value and realization assumptions are not forecasts. Not an offer or an indication of terms for any transaction.
At the end of the term the note is well covered under these assumptions. Its real exposure is earlier: if the operator defaults in the first year, in a weak market for used GPUs, the hardware may realize little more than the senior debt still outstanding. That is the risk the note is priced for, and it is where value insurance can change the economics.
What the note depends on
- Hardware value over time. How quickly the specific systems lose value, and how deep the market is for them after the contract ends.
- Timing of any default. A late default leaves the note well covered; an early one in a weak market may not.
- Operating costs. Interest is paid from cash left after costs and senior debt service, so rising power or colocation costs reduce it first.
- The end-of-term process. Clear obligations, a deadline and the noteholder’s right to step in turn an uncertain value into a realizable one.
- Value insurance. Where an insurer provides a floor on the hardware’s value, the note’s weakest case improves, which can lower its cost or allow it to be larger.
Who holds residual value risk
The investors best suited to a residual value note are those who understand hardware or are paid to take equipment risk: opportunistic and specialty credit funds, equipment lessors that can re-let or remarket GPUs themselves, and insurers that provide value floors alongside the note. Each brings something the senior lender does not want to hold, and each is paid for it at a rate that reflects the risk.
Where Park Street Global fits
Park Street Global designs GPU financings around this separation. We size the senior debt to what the contract can repay, structure the residual value position so that it sits cleanly beside the senior rather than inside it, and bring each part to institutional capital that wants that specific risk.
For operators, the result is more financing against the same deployment without weakening the senior lender’s position. For lenders already holding GPU loans, the same approach can separate the contract-backed portion of an existing loan from its residual exposure. We do not lend our own money, so the size of a financing follows the transaction rather than our balance sheet.
Common questions
Is a residual value note the same as a second lien?
No. It usually sits at the holding company and is secured by a pledge of the project company’s shares, not by a second lien on the equipment. That keeps the senior lender’s security and documents simple.
Why not simply use more sponsor equity?
Equity is the most expensive capital an operator has. A residual value note replaces part of it with capital priced for a specific, identifiable risk, which lowers the overall cost of funding the deployment while leaving real equity beneath it.
What happens if the operator defaults early?
The senior lender is repaid first from the contract’s remaining value and the hardware. The note is repaid from what the hardware realizes after that. In an early default in a weak market, the note may recover little, which is why it is priced higher and why value insurance matters.
Can value insurance replace the note?
Insurance can cover part of the hardware’s value at the end of the term, which reduces the risk the note carries. It usually complements the note rather than replacing it, because insurance covers value at a point in time while the note also carries the timing of any default.
Does the senior lender need to agree?
Yes. The senior lender agrees the cash trap, the limits on the note’s interest and the end-of-term process. Structured this way, the note does not weaken the senior position, which is what makes it acceptable to senior investors.