Key Takeaways from Digital Infrastructure ABS Panel at Opal ABS Summit 2024 Moderated by Chris Poggi

Ropes & Gray co-sponsored the Opal ABS Summit 2024 in Dana Point, California, on December 4-6, bringing together investors, fund managers, investment bankers, rating agencies and counsel for discussions around trends shaping the asset-backed securities (ABS) markets. Our partner Chris Poggi moderated a panel with speakers from Pacific Life, TCW, Kroll Bond Rating Agency and Bank of America on recent developments in digital infrastructure securitizations, while our partner Patricia Lynch also participated in the conference. Here are our attorneys’ insights on digital infrastructure ABS: 

Investor and issuer opportunities

• Digital infrastructure ABS is expected to continue growing. Primarily backed by data centers, fiber networks, and cell towers, digital infrastructure ABS has experienced tremendous growth over the past few years. Conference panelists expect that growth will continue, as investors become more familiar with these asset classes and rating agency methodologies are further refined. This space also benefits from many other tailwinds, including AI and massive anticipated growth in data storage capacity and broadband internet connectivity needs. Investor demand has continued to meet the increased supply in 2024, even as average spreads on digital infra ABS bonds tightened into the second half of the year.
• Investors are drawn to its favorable structural features. 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 (for data centers and business-to-business contracts) and strong customer demand. Crucially, this asset class offers attractive spreads compared to similarly rated investment-grade corporate bonds. For issuers, the ability to replace costly high-yield debt with investment-grade ABS notes can dramatically reduce their cost of capital, making the relative complexity of the structures worthwhile. 

Sector insights

• More consolidation in the industry is expected. Panelists expect to see more M&A activity among entire managers/platforms as some larger asset managers and sponsors seek to increase exposure to this sector through acquisitions versus building organically. The panelists anticipated that this trend would drive further increased ABS financing activity, given that ABS can provide the most efficient source of capital and acquisition financing available to many issuers.
• Trends point to more privately-placed transactions. The panelists noted that some issuers are turning to Section 4(a)(2) private offerings as an alternative to broadly syndicated 144A transactions. Reasons for that shift include:
  • A growing number of fund, insurer and other investors are able to provide large allocations to digital infra ABS offerings on single-investor or small-group basis;
  • Pricing of private offerings has become more competitive compared to syndicated transactions;
  • Issuers can preserve confidentiality; and
  • A growing number of funds, insurers and other investors are able to provide large allocations to digital infra ABS offerings on a single-investor or small-group basis.

In addition, while the transaction and asset structures are the same, the longer offering process involved in 144A transactions can provide less flexibility to issuers seeking to time their offerings to the optimal market windows. As a result, issuers may instead consider doing a series of smaller 4(a)(2) private placements over a period of time, averaging out the probability of capturing longer-term prevailing spreads. 

• Issuer regulatory and intercreditor issues may drive longer initial setup times. Poggi and other panelists remarked on certain aspects of digital infrastructure ABS transactions, particularly in the fiber broadband ABS space, that require lead time to address when initially structuring a deal: in particular, state and local regulatory licensing issues for broadband providers, and the need in many cases for compliance with covenants under continuing long-term senior debt. In certain cases, issuers turn to shorter-term bridge or warehouse credit facilities backed by the same assets that will ultimately back the ABS transaction in order to achieve liquidity goals pending the completion of regulatory and other structuring conditions to putting an ABS in place. Ropes & Gray has deep experience with advising clients on how to navigate and plan around such structuring issues.

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