Up, up and away for digital infrastructure market in 2024

There has been dramatic growth in the US esoteric securitization market in the last three years or so, but the pace isn’t about to slip, says Michael Nowakowski, director and interim head of structured products at Conning, a Hartford, Connecticut-based investment manager which caters to the insurance industry.

The leading light of the esoterics sector is the digital infrastructure market, chiefly comprised of data centre, wireless tower and fibre cable securitization. This is the boom business and this is where most action will be seen.

Issuance in this sector has grown from around US$16bn in 2020 to US$26bn in 2021 to US$28bn in 2022 to US$35bn this year. Next year could potentially see US$40bn, says Nowakowski. Regular issuers have been joined by new names in the last 12 months as borrowers see the usefulness and comparative cost effectiveness of securitizing their assets. Deals are also often sizeable – up to US$2bn.

“I see a big increase in fibre deals as cable companies see the value of the market. We saw a big one this year and if word gets out that ‘hey we can put this collateral in securitization at a reasonable cost of capital then cable companies will take advantage,” he says.

The large deal of which Nowakowski refers was a US$1.05bn securitization from Frontier Communications in July.

There is also particular potential for growth in the data centre securitization market beyond the now established corridor of northern Virginia into second and third tier markets like Atlanta and Dallas.

The piercing attractiveness of the securitization market to digital infrastructure borrowers is also occurring at a time in which bank lending is retrenching.

Conning has around US$205bn assets under management, and the structured finance bucket – which Nowakowski runs – comprises around US$19bn of that.

Single A infrastructure deals can furnish spreads of SOFR plus 300bp, and even though all-in yields have dropped in line with lower rates, a return of 7% or so at the front end of the curve is very attractive to asset managers like him.

The structure of digital infrastructure deals can also afford a level of comfort to investors that other types of securitized deals struggle to match. For example, in many cases the borrower owns the collateral, and this is the most valuable component of the deal.

Fibre cable contracts are often long-term, supplying users like student hostels or retirement communities. Even after that contract expires a new supplier would have to tear up the ground to install new cables so the barriers to entry are considerable.

There are also powerful incentives for the renters of data centre space to continue paying the rent whatever financial circumstances they find themselves in. In many cases, their business model depends on connectivity, so the rent must be made.

All this provides the investor with a high degree of confidence.

Conning moved into the digital infrastructure space earlier than most investors, and that degree of experience and savvy has allowed it to develop rankings for borrowers and structures. It knows what names and types of structures it likes best and why, and the structure it likes best is when the borrower owns the inherent equipment.

Within the esoteric space, Conning has also invested in the less frequented areas such as rail and container securitization, triple net lease contracts and even billboard revenue securitization. But these are occasional transactions, and it’s not where the growth in esoterics is coming.

The broader ABS space has seen hefty volume in the prime auto deals lately. “There’s been a bit of a deluge, which has forced spreads a little wider,” says Nowakowski. In part the weight of issuance is due to the stickiness of auto inflation rather than the number of new loans.

Unsecured consumer loan deals have also seen a recent uptick. Last week, Affirm announced it was raising US$406m in a securitization of point of sale unsecured loans in a deal called Affirm Asset Securitization Trust 2023-X1. At the end of October, Achieve, a digital finance company, sold US$157m of notes backed by AAA Consolidation Plus loans.

It is one of the most active borrowers in this space, with several deals last year, while Lending Point, another provider of unsecured loans, entered the space for the first time in July.

Traditional brick and mortar lenders are also active in the unsecured lending securitization space and Conning tends to prefer these deals as generally an established relationship exists with the consumer borrower and they have observable history and experience through economic cycles.

Yearly volume in unsecured lending is between US$5bn and US$15bn and a similar amount is expected in 2024.

Predictably, little more is expected in the ABS market for the remainder of 2023, but next year the digital infrastructure space is set to impress.

Simon Boughey