- Frontier's CFO flagged asset-backed securities as a key funding vehicle
- ABS deals offer a lower cost of capital, saving those that use them potentially millions each year
- Data centers could tap into the power of ABS offerings to fuel their massive growth plans
Frontier Communications CFO Scott Beasley knows a thing or two about finance. After all, he’s spent the past four years guiding the operator from bankruptcy to not only profitability but a $20 billion acquisition by telecom giant Verizon. As the data center industry rolls full steam ahead into a high-cost building boom, he’s got some words of wisdom: look into asset-backed securities (ABS).
In an exclusive interview with Fierce, Beasley walked through some of the key financial lessons learned during its turnaround. Chief among these? The cost of capital matters – a lot. And in the ranking of most expensive capital to least, equity is on the high end of the spectrum and ABS is on the bottom.
Unlike other funding vehicles, ABS use income-generating assets as collateral. ABS vehicles have historically been used by tower companies to raise money for new projects. But in 2023 Frontier became the first in the fiber-to-the-home space to pursue ABS with a $2.1 billion financing deal to fuel its fiber expansion. It subsequently struck several more ABS deals.
Why? Well as Beasley explained, Frontier emerged from bankruptcy with about $10 billion in corporate debt with an average interest rate of between 7% and 8%. That means it was stuck paying between $700 million and $800 million a year in interest alone.
But ABS offers a significantly lower interest rate. Beasley said even the ability to shave 2% off the cost of that $10 billion in capital would amount to $200 million more in extra cash that the company could pump into its fiber projects.
How asset-backed securities (ABS) can fuel data center growth
Translating that lesson to the data center realm, those who can secure lower interest rates on cash via ABS deals can in turn “invest in more land for data centers or upgrade GPUs at a faster rate.”
Why ABS Matters:
Lower Interest Rates: Traditional corporate debt can cost 7-8% in interest, while ABS can reduce financing costs by 2% or more—translating into millions in savings.
Scalability for Expansion: More available capital means faster investment in land, GPUs, and infrastructure upgrades for data centers.
Some businesses in the data center arena have already seen the light. Lambda, for instance, put its existing slate of GPUs up as collateral in an ABS deal that allowed it to secure $500 million in funding for its niche-cloud expansion.
But there’s room for many more such deals.
According to an October 2024 report from investment advisory firm DoubleLine, around $8 billion-worth of data center securitizations were issued in 2024. But there was another $25 billion in outstanding market potential last year, a figure which it tipped to double to $50 billion by 2027.
DoubleLine added it sees a “compelling investment case” for ABS given the current dynamics of high demand, constrained supply, low vacancy rates and high rents. While the firm noted it’s possible the current building frenzy could result in excess capacity, it argued this is unlikely to come to fruition “given the power and transmission infrastructure bottlenecks and booming demand from all sectors.”
How to secure an ABS deal
That said, data centers are still a relatively new kind of digital infrastructure. Beasley said even for Frontier, it took some convincing to get investors on board. Specifically, he said there were three key criteria investors wanted to see: stable and predictable cash flows, low ongoing capex after the initial investment and a competitive moat to ensure the investment wouldn’t be immediately devalued.
When developing an ABS proposal, Beasley said you’re going to want to put the most stable, revenue generating assets into the financing vehicle. Think GPUs that have a long-term contract with a customer who is leasing capacity.
Key Takeaways:
✔ ABS financing offers a powerful alternative to equity-based funding.
✔ Data center builders can unlock billions by structuring deals with stable revenue-generating assets.
✔ Engaging long-term investors (pension funds, insurance firms) is critical for success.
For data centers, though, he said the cash flows and competitive moat aren’t the problem, given the sticky client base for data centers and wave of demand. The biggest hurdle will be showing investors the capex needed to maintain and upgrade infrastructure like GPUs and who exactly will be paying those costs.
One other pro tip? Court the right investors and be patient about it.
“We knew we had to go to longest horizon investors possible, and that tends to be pension funds and insurance companies. They are big investors in ABS-type debt because they’ve got a cash need profile that’s decades long, not just the next quarters,” Beasley said.
But those investors had not previously invested in Frontier’s type of infrastructure. So, Beasley said the company spent months and hundreds of meetings pursuing them. While some didn’t come onboard for Frontier’s first ABS deal, the folks it put the effort into educating became some of the best investors in its second and third ABS tranches.
It's clear the data center market is poised for unprecedented ABS adoption — the question is, who will seize the opportunity first?