Other fiber builders exploring Frontier's fresh funding path

Frontier Communications' move to bridge a funding gap by securitizing fiber assets in the Dallas area to the tune of $2.1 billion of additional committed capital could prompt other fiber network builders to do the same, reckons an industry analyst.

Frontier's stock popped in the wake of the transaction, which centers on about 600,000 fiber locations in the Dallas area. Alongside debt and other financing, Frontier has about $4 billion of liquidity – considered enough for the telco to polish off its plan to build fiber out to 10 million locations inside its own footprint by 2025.

Other fiber network builders are sure to be taking notice, MoffettNathanson analyst Nick Del Deo surmised in a new report (registration required) that explores the implications of Frontier's transaction.

"We suspect we'll see more fiber operators move in this direction for financing," Del Deo explained, noting that Frontier's move "should just about take funding risk off the table for the foreseeable future. A key bearish argument [pertaining to Frontier's plan] has thus been largely resolved."

Del Deo said his discussions with others in the industry lead him to believe that the level of interest in fiber securitizations "has risen substantially over the past year."

He continued: "With the model now having been fairly well established for FTTH [fiber-to-the-home] operators and with borrowing rates up sharply in general, it wouldn't surprise us to see other high yield issuers, both public and private, with mature fiber clusters turn to this option to help manage their funding costs and pursue their builds."

Hints of more ABS action

Del Deo said fiber assets in relatively mature markets with penetrations of 30% or more are prime candidates for other telcos, but likely not a vehicle for players and markets that are in younger stages. Sticking with Frontier, he notes that its fiber clusters in parts of California and Florida are similar in maturity to the just-securitized Dallas assets. But it's not clear if Frontier will pursue – or even would need to pursue – similar asset-backed security (ABS) moves for those assets

Meanwhile, other operators have already hinted that they will take a closer look at ABS financing.

Altice USA, an operator that is upgrading sizable portions of its network to fiber and edging-out its own footprint, is considering all kinds of potential sources of financing. ABS is "certainly one that we are considering," CFO Marc Sirota noted on the company's recent Q2 2023 earnings call.

"Securitization is an option," Lumen EVP and CFO Chris Stansbury said on his company's earnings call when asked if ABS might be an option for Lumen. "There's other options as well. I think some options are closer in, some options are further out. But as we go forward, I think figuring out ways to capitalize what is a very intensive investment in the consumer business is something that we've got to explore and we are exploring."

A recent report from Bloomberg found that as many as six different companies have sold bonds backed by fiber tech since February 2023. That list includes MetroNet Holdings LLC, Allo Communications, Hotwire Communications and Tucows, the company behind Ting Fiber.

"For companies in which the capital path was less certain, such as FYBR [Frontier] and ATUS [Altice USA], the new market opportunity is a game-changer," analysts at TD Cown said in a research note about recent ABS activity in the fiber realm. "To that end, for some fiber players, ABS is seen as the preferred method of financing, for others it is seen as the maturation of the capital stack and a tool among many tools."

TD Cown also views the ABS-frenzy as possible fuel for future M&A aimed at scaling up fiber network assets, but notes that the timing of such activity is hard to pin down. "There is still plenty of private capital within FTTH, but the business is tough and reality is setting in with startups starting to struggle."

Cable's use of ABS deals 'a bit of a question mark'

Altice USA is flirting with the ABS model, but whether other cable operators will do the same "is a bit of a question mark," Del Deo explained. "Our understanding is that ratings agencies looking at these deals apply significant haircuts to the value of non-fiber assets – both copper and cable's HFC [hybrid fiber/coax] – due to the perceived risk of technological obsolescence."

While Del Deo doesn't agree that cable is facing obsolescence for HFC, he wonders if cable operators might try to structure ABS agreements that carve out new fiber network buildouts but exclude or reduce the contribution of their respective HFC assets.

Charter, a cable operator that is using federal, state and local funding to pursue aggressive builds in rural areas, is one potential example. Some of Charter's penetration rates on rural projects with pent-up demand have hit about 50% after just six months, and securitization could help operators "bootstrap future tranches," the analyst noted. At the end of the second quarter of 2023, Charter's customer penetration in subsidized rural passings of about 237,000 locations reached 32.5%, up from 27.2% in the fourth quarter of 2022.

But cable's role in the ABS-frenzy is speculation at this point. "Time will tell, but we'd expect this funding vehicle to be limited to fiber at least for the foreseeable future," Del Deo wrote.

Related posts:

— Jeff Baumgartner, Senior Editor, Light Reading