There’s been a lot of buzz about asset-backed securities (ABS) since Frontier pioneered the use of ABS financing for broadband buildouts last year. But understanding how ABS financing works isn’t easy.
One person who understands the topic very well is Frontier Chief Financial Officer Scott Beasley.
Telecompetitor talked to him recently and came away with a much better understanding of what ABS is and how it can benefit broadband providers.
ABS Explained
As Beasley explained, “An ABS is when you put specific assets that generate cash flow into a trust.”
In Frontier’s case, the assets that were put into the trust were fiber broadband assets in the Dallas-Fort Worth area.
The bank that strikes an ABS deal sells bonds associated with the trust, enabling the asset owner to essentially get a loan with a low interest rate and a payback date several years later. Frontier’s deal last year brought the company $2.1 billion for fiber buildouts.
“The cash flows from the assets [in the trust] go first to the owner of the debt [for interest payments], and any leftover cash flows go to us as the parent company,” Beasley explained.
As Beasley noted, “Because you’re able to put assets into the specific vehicle and borrow against that rather than against the whole company, you borrow at a better cost of capital. Because there is a very stable cash flow with a high degree of confidence that the debt will be paid off, there is a very low interest rate.”
The cost of capital for Frontier’s ABS deal is more than a percentage point lower in comparison with other financing options, Beasley said.
The company got the idea to pursue ABS financing after studying other digital asset classes, including data center and tower companies, Beasley noted. Both types of companies have used ABS financing for 10 years or so to fund ongoing expansion, and Frontier hopes to do the same.
“We looked at the stability of their cash flows and the stability of ours and we said, ‘There’s a lot in common here,’” commented Beasley. “You have a huge and proven technology… that’s going to be part of the country’s digital infrastructure.”
Moving forward, Beasley is hopeful that Frontier will be able to do an ABS deal every year.
Second Frontier ABS Deal
Financiers clearly are still happy with last year’s Frontier ABS deal, because they struck an additional ABS deal with Frontier several weeks ago.
Frontier’s primary interfaces for both deals were Goldman Sachs, which was the lead structuring advisor, and Barclay’s, which was the joint structuring agent. The two companies also were the lead bookrunner and joint active bookrunner, respectively, for both deals, meaning that they sold bonds created in the deal to investors.
Other bookrunners for both deals were Citizens JMP Securities, Deutsche Bank Securities, Fifth Third Securities, J.P. Morgan Securities, Morgan Stanley & Co., and TD Securities.
This year’s deal brought Frontier an additional $750 million that is secured by additional fiber broadband assets in Texas. The company will use some of the money to repay existing loans and some for additional fiber buildouts.
Frontier must repay the money it borrowed through the ABS deals in five years. When the principal comes due, Beasley anticipates that Frontier will be able to strike similar deals so that the company will continue to have funding for investment.
“The contemplation would be that these are really healthy assets and so in five years you can refinance existing notes with additional ABS deals,” he explained. “Five years from now, there should be even more cash flow from those assets.”
Only 720,000 of the company’s seven million fiber passings have been used to secure Frontier’s ABS financing, Beasley noted. That leaves nearly 90% remaining for possible future deals.
As Beasley put it, “We have a lot of capacity to fund the rest of our build and refinance existing debt.”
For now, Frontier is the only publicly held broadband provider that has used ABS financing. But there is a lot of speculation in the industry about other companies joining them, as ABS seems to be a great option for providers with fiber assets at a time of major network expansion.
