More companies are tapping asset-backed bond markets to fund an expensive buildout of fiber-optic networks, which offer faster internet connections than copper wires or wireless connections.
(Bloomberg) — More companies are tapping asset-backed bond markets to fund an expensive buildout of fiber-optic networks, which offer faster internet connections than copper wires or wireless connections.
As many as six different companies have sold bonds backed by payments on fiber technology since February, according to data compiled by Bloomberg. The first bond of its kind was sold in 2020, according to the data.
This week Frontier Communications Corp. began marketing a $1 billion deal that may be increased to as much as $2.1 billion, according to a report by Fitch Ratings. The deal is backed by Frontier’s fiber network in the greater Dallas, Texas area, including broadband, phone, video and other services for around 286,000 residential and commercial customers, the report said.
Telecommunications companies are ramping up their switch from older copper and wireless infrastructure to fiber networks, and non-investment grade rated firms in particular are turning to asset-backed markets to fund those investments. Compared to the alternatives, like raising equity or issuing unsecured corporate debt, it’s frequently the cheapest option, according to said Ben Hunsaker, a portfolio manager at Beach Point Capital Management.
“It’s capital intensive to convert their infrastructure from legacy to fiber, but that is the growth trajectory for their business models,” said Hunsaker. “For these companies, securitization is becoming the lowest cost of capital available.”
Asset-backed markets also offer relative calm right now compared to leveraged finance and high-yield markets, which are exhibiting signs of stress such as rising numbers of bankruptcies, said Dan Zwirn, chief investment officer at Arena Investors.
“ABS markets, despite material diminution in many underlying collateral types, have remained more resistant to recognizing reality,” said Zwirn. “One might expect folks in this business to shoehorn a corporate square peg into a structured finance/ABS round hole.”
Fiber-optic cables are strands of glass wrapped in rubber casing that transmit data via pulses of light, and they’re far faster than alternatives like wireless internet or copper wire, according to the Fitch report. Telecoms firms are racing to build new fiber networks, at least partly because dependence on fast internet grew during the pandemic and the Biden administration has pledged billions to help with an infrastructure upgrade.
Other companies that have sold fiber ABS recently include MetroNet Holdings LLC, the company backed by KKR & Co. Inc. and Oak Hill Capital Partners, which in October sold a deal that bundled contract payments from fiber lines. Meanwhile Allo Communications LLC, issued bonds in June, and Hotwire Communications LLC tapped the market with a fiber-backed ABS in May. And publicly traded Tucows Inc.’s unit Ting Fiber recently closed an offering for $239 million, with plans to use the proceeds to fund the expansion of its fiber networks, according to a press release at the time.
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Spread Change
Relative Value
While there is concern about changing risk weights around the upper bound as part of possible new upcoming regulations, analysts at Citi say the risk weights are likely to be flat or even slightly lower than current levels, according to a report dated July 18.
- If risk weights and capital requirements indeed move against banks, then it would be a major headwind: “At a risk weight of 60% or more, the NIM increase required to offset the higher capital requirements could balloon to multiples of the amount needed under a 50% risk weight,” wrote analysts Chris Marazzo, James F Desorbo, and Ankur Mehta
- But this “reflexive concern” may not materialize
- According to an analysis, “while 11% of the collateral would receive a higher risk weight, 37% would receive a lower one, and 52% would remain unchanged. This would imply an overall risk weight that is roughly neutral at 48.7%”
Quotable
“The overall consumer abs landscape remains quite strong particularly for traditional abs segments. Subprime and unsecured consumer loans being one of the exceptions to that. I think as rates have backed up it is pressuring certain issuers and securitizations. We have seen some instances where issuers have had to change structures (increase hard credit enhancement) as a result of higher borrowing costs and lower excess spread in securitizations,” said Peter Kaplan, a portfolio manager at Merganser Capital Management.
What’s Next
More ABS issuers are kicking off pre-marketing for next week, including Bank of America Auto Trust and Foursight Capital. An equipment deal from AGCO Finance, a consumer loan from Achieve, and an inaugural fiber infrastructure trade from Frontier Communications are also expected to sell new debt.
–With assistance from Carmen Arroyo.
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