Fiber broadband is gaining importance as an asset class in continental Europe and the U.K. High-speed and reliable broadband access has increasingly become a necessity. However, S&P Global Ratings believes the sector is not fully comparable to other essential utility services. Utilities tend to be natural monopolies while fiber still competes with other data networks, such as cable networks in some markets.

The fiber broadband sector is less mature than water or power utility services, given only 35% of the occupied households in Europe have adopted fiber. This penetration rate is still low compared to almost 100% for utilities such as water or power.

Although we consider fiber to be the lead access technology for broadband services in Europe going forward, we are mindful that the evolution of technology to transmit data and customer preferences are difficult to predict. We have seen a significant shift in telecommunications stemming from technological developments over the past 15 years. However, truly disruptive technologies would likely take decades to develop, commercialize, and reach the scale of deployment necessary for true industry disruption.

Fiber's Low Operational Risk Likely To Support Business Stability

Given fiber's performance and reliability advantages, as well as the simplicity of maintenance, we expect the operational performance of a fiber infrastructure operator would be stable. Thus, we believe fiber networks, once installed and adopted, should be resilient to technological and maintenance challenges.

Incremental improvements in supporting technologies are more likely to improve fiber performance over time.  Although upgrades to fiber networks will almost certainly occur over time, we expect them to focus more on the active equipment rather than on the passive fiber cables themselves. This means technology improvements are likely to strengthen fiber's performance over time but not fundamentally replace fiber networks. For example, improvements to switching and routing equipment can reduce latency, improved transceiver technology may improve data rates, and advances in multiplexing technology would increase capacity. As a result, we expect technology improvements would give fiber networks long-term flexibility to maintain a technological edge over other broadband technology.

Limited operating risks typically point to an assessment of low risk for asset-class operations stability (ACOS) under our project finance methodology.   Under that methodology, the assessment for ACOS of a fiber operator could be at the low end on our scale of 1 to 10, if operations and maintenance functions were to be deemed simple, even when subject to accessibility in densely populated areas. There is a key difference with comparable traditional infrastructure assets shown in table 1; for fiber networks, we may consider adjusting our assessment upward in the long term if we believe the lifecycle requirement may become less predictable, because of the exposure to technological upgrades or changes.

Table 1

We expect 5G fixed-wireless access (FWA) to remain a niche in most European markets.

FWA is the use of 5G wireless communication for providing broadband connectivity to a fixed home or business location, rather than for mobile phone usage. It essentially connects the home or business to the closest installed 5G antenna, or cell, which then further transmits the data via fiber networks.

Clearly, the threat of such alternative technology cannot be ignored. For example, 5G FWA seems to be making inroads in the U.S., with experts predicting a potential market share of 10% as achievable by 2026, almost twice higher than today. This threat is notably exacerbated by aggressive strategies of U.S. mobile operators aiming to take market share from fixed cable and fiber operators.

The European market is, however, structured very differently, with most operators having converged. Hence, their mobile divisions have little incentive to cannibalize subscribers from their fixed divisions. We estimate the current market share of European residential broadband subscribers at roughly 35% for copper, about 45% for fiber, about 15% for cable, and the remaining 5% split between FWA, satellite, and other technologies.

Beyond the converged structure of European carriers, we expect 5G FWA to remain a niche technology for other reasons:

• Fiber is typically regarded as a better product in terms of reliability, speed, energy use, and dedicated bandwidth for data traffic.
• Improving FWA at high frequency spectrum will require the rollout of an extensive network of 5G antennas, such that fiber backhauls--dedicated connections between access nodes and the core network--come closer to end users, and the wireless tail or latency gets shorter. This would likely weaken the profitability of FWA and its competitive threat.
• Even if FWA uptake is stronger than our expectations, fiber networks can offset some of the subscriber losses to FWA by providing wholesale backhaul services to the small 5G cells offering FWA service.
• Spectrum capacity constraints are likely to force wireless carriers to prioritize mobile subscribers over FWA subscribers in the longer term, given greater demand from in-home users, which carriers typically prefer to meet by offloading to fixed networks.

FWA could be a bigger competitive threat in rural, less-densely populated areas, where unitary FTTH connection costs are higher, and FWA spectrum capacity is less likely to become constrained.

We would most likely factor in the uncertainties of long-term technology risks through more conservative penetration assumptions and a limited rating horizon.   Because cash flow visibility decreases in the long term, we are likely to assume a decline of fiber's market share in our base case and for our downside forecasts under our project finance methodology. The extent of this differs from market to market and depends on some of the 5G threats outlined above.

We would likely assume a useful economic life of a fiber project's assets that is significantly shorter than their physical asset life. The determination of actual economic life in our analysis is guided by our visibility of cash flows. For instance, we may consider predictability from regulations or monopoly concessions agreements to the extent that we see them as tested and stable. Absent these protections, we could limit our forecasts to a couple of decades, if long-term technology or other risks become too uncertain.

This would be particularly important for projects that involve refinancing. In this case, we assume the to-be-refinanced debt to be amortized and repaid before the end of the economic life.

Predictable Revenue Via Regulations Or Contractual Protections Key To Mitigating Market Risk

Strong mitigants, such as regulated remuneration, supportive concession features or strong contractual offtake agreements, are key to limiting market risks and, thus, achieving a strong operations phase business assessment (OPBA) in any project financing. We illustrate what could be considered for a fiber project financing in chart 1.

Chart 1

Without protection from market risks, as per our methodology, the business assessment would be much weaker--implying a much higher OPBA--due to the greater risk of volume and, consequentially, revenue variability. For fiber projects, these risks could stem from unshielded competition from existing cable and copper network providers, or even other technologies like 5G FWA and satellite.

Strong Fiber Operators May Achieve OPBAs Comparable To Typical Core Infrastructure Project Financings

If market risks are deemed as mitigated, a fiber project may achieve an OPBA comparable to typical core infrastructure project financings in Europe, Middle East, and Africa (EMEA), as illustrated below.

Chart 2

Chart 2 illustrates how distinct market risks have major impacts on the OPBA outcome among our rated infrastructure projects in EMEA (as of February 2024). Most of the rated universe, comprising core infrastructure backed by concessions, regulation and/or contractual framework, have their market risk assessment adding one or two levels from Performance Risk to the OPBA (light blue). As the risk of competition grows, the market risk among the portfolio lifts the ACOS by three or four levels to derive the OPBA (dark blue). A similar logic would apply to fiber projects.

Revenue Counterparties' Creditworthiness May Cap Our Fiber Project Rating

The creditworthiness of the offtaker would likely represent a constraint to our rating on a fiber company under an anchor-tenant scheme. For a wholesale fiber operator with multiple alternative internet service providers (ISPs), the starting point for our analysis would likely be the weighted average of the ISPs' creditworthiness rather than the creditworthiness of the weakest one. This is only if we assess the ISPs' volumes as interchangeable, provided we are comfortable with the willingness of other ISPs to take over in case one loses market share or is in distress or default.

Other considerations under our methodology are whether the timeliness and availability of liquidity for such replacement strongly mitigate any risk of cash flow disruption to the project, or if we expect the ISP would continue to service the contract even during a bankruptcy proceeding.

A full separation of the rating on a project from the revenue counterparty risk would be unlikely. We would likely consider that approach only for retail-based models, where payments are directly received from the users or if, under very specific market conditions, a wide range of offtakers could be considered easily replaceable.

Chart 3

For Major Fiber Expansion, Assessing Construction Risk May Be Critical

The difficulty in fiber rollouts can vary significantly, depending on the area, due to population density or presence of existing utility infrastructure to be relocated, for example. Thus, even if a fiber network is already in operation, we may need a construction phase assessment for subsequent rollouts or expansions of the network, if we consider the work to be material, given its impact on the project's operational and financial performance. If not material, we wouldn't necessarily assess construction risk. This could most likely be the case for connection capex related to last-mile works to link the main fiber back-bone to the home.

Be it a project with construction risk or an expansion within the operation phase, it is important to assess the potential funding needed for predictable delays in construction work (operating cash flow, equity, or debt commitments, as well as dedicated reserves), and how the project's cash flow waterfall would protect senior lenders. To the extent that the timing, amounts, and funding are determinable in advance, our methodology allows us to factor in such works without a negative impact on our rating on the project.

Expansion May Test Structural Protections And Insulation From A Parent Entity

A pressing need for higher fiber uptake may require a business model with some flexibility. Under our project finance methodology, this could lead us to regard cash flow generation for debt servicing as less predictable, which would be negatively reflected in our rating outcome.

If we consider the fiber project does not contain the minimum attributes to protect the assets and cash flows, compromising its limited-purpose nature and bankruptcy remoteness, we may not be able to analyze it using our project finance methodology.

Business expansion, even if subject to restrictive covenants, may expose a fiber project to greater risks than for typical project financing.   As the fiber industry matures, considerations on business consolidation or expansion of similar activities in other comparable areas could be relevant. The typical project finance transaction we rate comprises a closed portfolio of assets with limited permitted activities. Although we can rate an open portfolio, in which asset composition may change over time, it needs to meet specific conditions and protections in place to ensure the expansion does not weaken the transaction structure. Even if restrictions are in place, the possibility to expand may lead to a lower rating outcome. Only if there is certainty that, despite the expansion, the project's creditworthiness would not be impaired, would the rating not include a negative adjustment.

We would not regard a fiber company's debt as project financing according to our methodology, if the operator's business may expand considerably into riskier areas, such as commercializing telecommunications or media-related services to end users, or if loosely defined additional covenants allow for material additional capex.

Although a project's debt is typically nonrecourse to the parent company, the parent's creditworthiness may still pose a constraint.   A fiber project's creditworthiness could be seen as delinked from that of the parent (typically a telecom company) or sponsor if the project is adequately ring-fenced from sponsors. However, this would not be the case if there are material dependencies between the parent and the project. It is not uncommon for fiber companies to have maintenance contracts with the parent company. For the parent's creditworthiness not to pose as a constraint, we expect these contracts to be agreed at market prices and benchmarked appropriately. Alternatively, if there is cross-default or if the project's expansion completion relies on the parent, our rating would be limited by the rating on the parent.

An imperfect security package may be acceptable if assets cannot be practically pledged.   For fiber networks, it is possible that the optic fiber cables cannot be pledged due to regulation or legal limitations, like a toll-road concession or pipelines. When the network's pledge is possible but economically impractical, we could consider the security as partial unless certain protections or undertakings are in place to provide strong protection against a third party getting hold of the physical network. Unless we are comfortable that the lenders have the same rights as the project, the security weakness may have a negative impact on the final project rating as it does not have the same security over all assets and contracts as comparable projects.