Fixed income

Fiber ABS: financing the future of digital infrastructure

November 27, 2024 - 5 min read

David Rittner, CFA, Investment Strategist & Vinnie Zhang, CFA, Senior Research Analyst
Loomis Sayles

Fiber-optic technology is transforming the way we connect to the internet, and fiber asset-backed securities (fiber ABS) can offer a way for investors to gain exposure to this digital shift. As telecom companies ramp up efforts to expand fiber networks to meet surging demand for high-speed internet, fiber ABS has emerged as a compelling funding solution in the securitized market.

In this article, we’ll explore how fiber ABS works, why it’s gaining traction and the key considerations we think investors need to keep in mind when evaluating these securities. But first, we’ll examine the growing role of esoteric ABS in the securitized market, with fiber ABS representing one of its most promising sectors.

Why esoteric ABS became a vital part of the securitized market

The composition of the asset-backed securities market has shifted dramatically over the past decade, reflecting changes in both market dynamics and investor preferences. In the years following the global financial crisis, stricter regulatory frameworks and changes in consumer behavior have curbed the issuance of traditional ABS types such as credit card, auto and student loan-backed securities. At the same time, a new generation of ABS—known as esoteric ABS—has emerged, expanding from 15% of the market in 2013 to around 40% today.¹

Esoteric ABS as a percent of total ABS

Chart source: Morgan Stanley, "A Primer on Digital Infrastructure ABS," data through June 2024. The chart presented above is shown for illustrative purposes only. Some or all of the information on this chart may be dated, and, therefore, should not be the basis to purchase or sell any securities. The information is not intended to represent any actual portfolio. Information obtained from outside sources is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This material cannot be copied, reproduced or redistributed without authorization.

Unlike traditional ABS, esoteric ABS focuses on niche or non-traditional assets. These securities can be backed by unconventional revenue streams—including royalties, telecommunications networks or equipment leases—providing exposure to sectors that may otherwise be inaccessible to fixed income investors. They allow investors to tap into nuanced economic trends and industry growth cycles, such as the rise of e-commerce, private aviation and fiber-optic networks.

Tech demand fuels the expansion of fiber ABS

Driven by the rising demand for faster internet speeds and greater bandwidth, we believe fiber ABS is one of the most attractive opportunity sets in the esoteric ABS market. Fiber networks use glass strands to transmit data through pulses of light, making them faster and more reliable than traditional networks. Though still a nascent market segment, aggregate fiber ABS issuance has grown to more than $10 billion, with more expansion expected.²

Fiber ABS outstanding

Chart source: JP Morgan. Underlying data published as of 1 November 2024. The chart presented above is shown for illustrative purposes only. Some or all of the information on this chart may be dated, and, therefore, should not be the basis to purchase or sell any securities. The information is not intended to represent any actual portfolio. Information obtained from outside sources is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This material cannot be copied, reproduced or redistributed without authorization.

Despite the advantages of fiber networks—such as faster speeds and greater reliability—fiber coverage in the US remains relatively low, with only 17% penetration as of the end of 2023 (see chart below). But with consumer appetite for data-heavy activities like video streaming and online gaming continuing to grow, the need for reliable, high-speed internet is only expected to increase.

Broadband market share

Chart source: Morgan Stanley, "A Primer on Digital Infrastructure ABS," published 12 October 2023. The chart presented above is shown for illustrative purposes only. Some or all of the information on this chart may be dated, and, therefore, should not be the basis to purchase or sell any securities. The information is not intended to represent any actual portfolio. Information obtained from outside sources is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This material cannot be copied, reproduced or redistributed without authorization.

Expanding fiber networks requires significant upfront capital, and fiber ABS offers telecom companies an innovative, cost-effective way to meet these funding needs by packaging high-quality fiber assets into securities. This structure enables companies to secure off-balance-sheet financing and access lower borrowing costs by leveraging the stable, long-term cash flows generated by their networks. With ABS reducing the need for excessive corporate debt, telecom providers can accelerate network expansion and position themselves to capture market share. As demand for high-speed internet grows, fiber network build-outs are expected to accelerate, with ABS playing a critical role in supporting this development.

Some key considerations for investors

Investing in fiber ABS requires careful due diligence, as these securities depend heavily on both the health of the sponsor and the strength of the collateral:

1. Sponsor health:

Fiber ABS issuers include traditional telecom providers upgrading older copper networks as well as "fiber overbuilders" expanding on top of existing broadband infrastructure to gain market share.
Many issuers carry high levels of corporate debt, meaning that strong execution and financial discipline are critical to their success.
Recent merger announcements—such as BCE’s acquisition of Ziply, Verizon’s offer to buy Frontier and T-Mobile’s joint venture with KKR—highlight how acquisitions can improve credit profiles and stabilize cash flows.

2. Collateral strength and competition:

The size and quality of a sponsor’s fiber network, its market penetration, and the competitive landscape are essential to the performance of fiber ABS, in our view.
Customer churn rates also play a significant role in determining cash flows, as higher retention typically leads to more stable ABS performance.

Capitalizing on the growth of digital infrastructure

With demand for high-speed internet set to grow, we believe fiber ABS offers investors a way to align with an essential part of the modern economy while gaining access to higher yields and improved diversification from the sector’s idiosyncratic risk profile.

An essential building block of tomorrow’s digital infrastructure, fiber ABS is becoming more than a niche asset class, in our opinion. As the fiber landscape evolves, we believe fiber ABS could be a fit for insurance mandates given their preference for longer-duration assets (five to seven years) with stable cash flow profiles to match their liabilities. In our view, investors who understand the nuances of the esoteric ABS market from both a corporate and securitized perspective will be well-positioned to capitalize on this opportunity set.

¹ Morgan Stanley, "A Primer on Digital Infrastructure ABS," data through June 2024.

² JP Morgan, as of 1 November 2024.

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