Interestinghttps://www.wsj.com/finance/investing/private-equity-borrows-billions-to-bring-you-broadband-internet-2d75c1ae?
Wall Street is churning out billions of dollars in complex bonds to bankroll construction of broadband fiber-optic networks, part of a nationwide push to widen high-speed internet access.
Telecom companies have already sold more than triple the number of so-called fiber bonds they borrowed in all of last year. That has helped pay for expanding high-speed internet into small and midsize cities where residents and businesses previously had only one choice—expensive and spotty service from cable monopolies.
Private-equity firms see money to be made: They have stakes in all of the companies issuing the bonds and have the most to gain from the borrowing boom. Leaders in the communities that are affected say the internet upgrade can’t come fast enough.
Satellite and cellular-phone networks that cover remote areas can’t transmit large amounts of data as reliably as fiber-optic cable, creating a digital divide across the country.
The private-equity push into broadband is part of a broad shift by investment firms over the past decade toward renewable energy and technology projects. Private infrastructure investments likely will hit $1.9 trillion by 2026, overtaking real-estate investments, according to research firm Preqin. Federal funding promised by the Biden administration accelerated the land grab.
Broadband network providers issued about $4 billion of fiber-backed bonds so far this year, compared with $2.6 billion in all of 2021 and 2022 combined, according to data provider Finsight. Borrowers pledge revenue from existing residential and business internet contracts to pay interest and principal, an attractive feature for bond investors. That enables smaller companies with low credit ratings to issue bonds with investment-grade ratings, which translates to more borrowed money at lower interest rates.
Private-equity funds typically use debt to purchase and grow their “portfolio companies,” ideally boosting returns they make when they sell out of the investments. Using debt to build fiber-optic networks has backfired in the past.
Companies such as Global Crossing, TyCom and 360networks used junk-bond markets at the turn of the millennium to fund fiber-optic networks between continents and major cities. They went bankrupt because of overcompetition, and because internet usage was still too sparse to pay off the cost of the networks, analysts said.
Now fiber-optic operators are being more cautious about overlapping in small markets, and the new bonds give lenders far more protections than the unsecured debt that companies such as Global Crossing used, the analysts said.