SFVegas 2024: Key takeaways on the current ABS landscape in the U.S.

Ropes & Gray’s Securitization team recently participated in the Structured Finance Association’s SFVegas 2024 conference. Here are some of our key takeaways on the current ABS landscape in the U.S. as it relates to Ropes & Gray’s market-leading complex securitization practice.

High growth expected for digital infrastructure ABS

Digital infrastructure ABS is expected to experience significant growth over the next few years. One panelist estimated that data center ABS issuance represented approximately $12 billion in 2023 and could grow to up to $70 billion annually by 2030. 

Another panelist indicated that issuance in the nascent fiber ABS space represented approximately $4 billion in 2023 and is likely to experience a high rate of growth over the next five years, as investors get more familiar with this asset class and rating agency methodologies are fine-tuned.

Several aspects of digital infrastructure ABS are attractive to investors, such as the non-correlated nature of the asset, low churn, high initial infrastructure cost as a barrier to entry for competitors, creditworthy customers (with respect to data centers and business-to-business contracts) and strong customer demand.

Banks are aiming to broaden the investor base for digital infrastructure over the next few years, including to more corporate debt investors. We recently represented Frontier Communications in connection with a fiber broadband securitization financing. You can read more about it here.

Developments in whole business securitizations

While whole business securitization (WBS) issuance levels were down in 2023 as a result of interest rate hikes and other macroeconomic factors, several outstanding whole business securitizations will hit their anticipated repayment dates in 2024, which together with improving macroeconomic trends are expected to prompt additional issuances in 2024.

In addition, panelists noted that WBS issuers are no longer limited to restaurant franchises, and have expanded in recent years to include other types of franchises in cleanup services, fitness, personal care and other areas, which trend is likely to continue. 

Another development in both WBS and other securitizations (such as digital infrastructure ABS) is the increased use of so-called “Growth VFNs” which consist of variable funding note series (revolving notes that are backed by the relevant securitized assets and incorporated directly into the securitization capital structure on a super senior basis) with incremental commitments that can be unlocked subject to certain growth metrics being attained by the securitized assets. 

There is also growing interest in the use of WBS in the context of M&A transactions, as financing can be obtained at cheaper rates, which is particularly attractive in a high interest rate environment. Find more on WBS here.

Macroeconomic trends

While conference participants were largely highly optimistic about ABS market trends for the first half of 2024, the second half of 2024 brings with it some uncertainty for issuers and investors. On the one hand, it is expected the Fed will begin a series of interest rate cuts in the second half of 2024, which may unlock interest from issuers with respect to potential issuances. 

On the other hand, some conference participants were advising that uncertainties surrounding the U.S. elections in November may cause investors to be cautious in early fall and Q4 as they adopt a “wait-and-see” approach.

If you would like to discuss in more detail any of the topics mentioned above, please contact us, or one of the Ropes & Gray attorneys below. 

Thank you to associate Matthieu Wharmby for helping prepare this post.

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