Step-In Rights for GPU Collateral
How lenders protect access to GPU hardware deployed in third-party colocation facilities. Essential reading for private credit teams structuring equipment-backed loans.
What happens if a colocation provider defaults (step-in rights)?
Step-in rights allow lenders to assume control of a borrower's colocation agreement if the borrower defaults. For GPU-backed loans, this is critical because the physical hardware is located in a third-party facility. Key provisions include: (1) direct agreement with the colo provider, (2) notice and cure periods (typically 30-60 days), (3) ability to relocate equipment, and (4) assumption of service contracts. Without proper step-in rights, lenders may face stranded collateral.
Key Data Points
- Direct Agreement with colo provider required
- Typical cure period: 30-60 days
- Must include equipment relocation rights
- Service contract assumption provisions
Why Step-In Rights Matter for GPU Loans
In a traditional equipment loan, the lender can repossess collateral directly from the borrower's premises. GPU-backed loans are different: the hardware typically resides in a third-party colocation facility under a separate service agreement.
Without proper step-in rights, a lender faces a nightmare scenario:
The "Stranded Collateral" Problem
Borrower defaults. Lender attempts to recover GPUs. Colocation provider refuses access, citing unpaid bills or lack of authorization. GPUs sit idle, depreciating, while lawyers negotiate. By the time access is granted, collateral value has dropped 30%.
Key Provisions in a Step-In Agreement
1. Direct Agreement
A tri-party agreement between lender, borrower, and colo provider. The colo provider acknowledges the lender's security interest and agrees to cooperate in enforcement scenarios.
2. Notice Requirements
Colo provider must notify lender of any borrower default (usually non-payment). Lender gets 30-60 days to cure the default or take over the agreement.
3. Facility Access
Explicit right for lender (or its agent) to enter the facility, inventory equipment, and arrange for removal or continued operation.
4. Contract Assumption
Option for lender to assume the colocation agreement and continue service, or to assign it to a new operator/purchaser of the GPUs.
Negotiating with Colocation Providers
Most major colocation providers (Equinix, Digital Realty, QTS, etc.) have standard forms for lender acknowledgment letters. Key negotiation points:
- Cure period length: Push for 60+ days to allow time for workouts
- Lender payment priority: If lender cures borrower's arrears, those payments should reduce secured debt
- Equipment marking: Clear identification of which racks/GPUs are covered by the security interest
- Relocation rights: Ability to move equipment to another facility without provider consent
- Insurance: Lender named as additional insured on equipment policies
UCC Considerations
Step-in rights complement—but don't replace—proper UCC-1 filings. The security interest must be perfected under Article 9, with filings in:
- Borrower's state of organization (for general intangibles)
- State where equipment is located (for fixtures, if applicable)
Pro Tip: Equipment Schedules
Maintain detailed equipment schedules with serial numbers, rack locations, and acquisition dates. This simplifies both UCC descriptions and physical recovery. Our platform exports IC-ready equipment schedules with one click.
Enforcement Scenarios
| Scenario | Lender Action | Typical Timeline |
|---|---|---|
| Borrower colo default | Cure arrears, assume agreement | 30-60 days |
| Borrower loan default | Exercise step-in, continue operations or sell | 60-90 days |
| Borrower bankruptcy | Seek relief from stay, adequate protection | 90-180 days |
| Colo provider insolvency | Relocate equipment to alternative facility | 30-60 days |
The 'Lender Remedies' Playbook
- Model tri-party step-in agreement
- UCC-1 filing checklist for GPU equipment
- Enforcement timeline and cost estimates
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