Frontier is helping fiber securitization take off

  • Frontier closed a $2.1 billion fiber securitization deal for its Dallas market in 2023

  • Ropes & Gray attorney Christopher Poggi said asset-backed securitization for fiber companies is still nascent

  • But he noted not every broadband market is ready for an ABS offering

It’s a no-brainer that fiber providers need some way to get the money they need for their passings targets, whether that’s tapping into government grants or private equity support. However, Frontier Communications is pursuing a third option.

Frontier last August inked a $2.1 billion asset-backed securitization (ABS) deal – the first public company in the U.S. to secure funds backed by fiber-to-the-home (FTTH) assets.

In a nutshell, ABS is a type of financial investment that uses income-generating assets as collateral and is an alternative to other ways of raising capital, like corporate bonds or bond funds.

Ropes & Gray attorney Christopher Poggi told Fierce the ABS space is pretty new for fiber. Three years ago, “there wasn’t a single ABS offering for a fiber company.”

We recently chatted with Ropes & Gray about trends in the digital infrastructure space, and they noted 2023 was “a record year” for fiber ABS issuance. But Poggi said ABS offerings can be “extremely complicated to set up.”

“Because to isolate the market that a fiber operator wants to securitize, you basically have to take their company apart and put it back together in a group of special purpose subsidiaries,” he explained.

Regulatory issues are another concern with ABS as well as just “put[ting] the time and resources into analyzing and understanding” the process.

Finding the right market (if the shoe fits)

In Frontier’s case, the operator securitized approximately 600,000 fiber locations in its Dallas market and raised Frontier’s debt to around $3,400 per passing. Dallas is probably the company’s “most mature and highly penetrated” market, said Poggi.

So, it’s unsurprising they went after the market that “was going to get the most enthusiastic response from investors.” And shortly after announcing its fiber securitization, Frontier relocated its headquarters from Norwalk, Conn., to Dallas – likely signaling the importance of the market.

“Not every broadband market is going to be ready for ABS,” Poggi said. “It has to be kind of one that’s already built out.”

He explained rating agencies will evaluate ABS deals for ISPs by looking at whether the company has a high penetration rate or if it’s a “first mover” in a market.

“If you’re the incumbent, you’re unlikely to be disrupted by another provider,” said Poggi. However, if an ISP is “still up-and-coming in a certain market” or is in general a smaller provider, they’ll “have more trouble securitizing that market until [they] reach a certain penetration level.”

As for whether Frontier might pursue ABS in any of its other markets, he declined to comment on specifics but noted the company said publicly that it “plan[s] to explore that.”

The subject of Frontier’s fiber securitization came up at an investor conference last week, where Chief Strategy Officer Vishal Dixit described ABS as a source of “sustainable financing.”

“We have many, many mature markets,” he said at New Street Research and Boston Consulting Group’s Fiber to the Future Conference. “We have a clear line of sight to funding and financing our committed build.”

New Street’s Jonathan Chaplin noted at the event the firm has figured out a “rough algorithm” for ABS where every time a fiber company adds around 125,000-150,000 fiber customers, “they can go and raise a billion dollars of debt against it” and “the deals are coming in around $7,000 per customer in terms of available financing.”

Multiple ABSs are now happening in the FTTH space, Dixit noted (Ziply Fiber is one recent example), but not every deal is the same.

“If you’re looking at market structure, if you’re securitizing a portfolio of assets that’s predominantly in two-player markets, versus three or more-player markets, there is something you need to think through there,” Dixit said. “So I guess maybe they’re not all equal but it is a very sustainable and increasingly mature source of financing.”