Following announcements from large fiber equipment providers that they are building fiber equipment manufacturing plants in the United States, the telecommunications industry is turning its focus from domestic manufacturing requirements to other regulatory burdens that have the potential to bar Broadband Equity Access and Deployment projects.
Of those regulations, matching and letter of credit requirements could be the major hurdles. Rules for the $42.5 billion BEAD program require that grantees produce a match of at least 25 percent of total program awards on top of a letter of credit. A letter of credit certifies that a bank will reimburse the federal government with 25 percent of program awards in the event of a default.
“Nobody wants to see BEAD funding go to waste. But requiring applicants to provide a 25 percent match and a 25 percent letter of credit risks shutting out those best-placed to bridge the digital divide and does little to protect U.S. taxpayers,” Connect Humanity CEO Jochai Ben-Avie told Broadband Breakfast. Connect Humanity is a digital equity advocacy group that invests in community connectivity providers.
Matching requirement
Many small, rural, minority and women-owned internet service providers and municipalities are ready and willing to build affordable, high-speed broadband in America’s least served and most marginalized communities, said Ben-Avie. “But, unlike the large incumbents, they don’t have millions of dollars spare to scale the BEAD capital hurdle,” he said. He called the letter of credit requirement a test of a provider’s ability to lock up working capital rather than the provider’s ability to deliver high-speed broadband.
“Past federal broadband investments had either a match requirement or a letter of credit – not both,” Ben-Avie . This combination of requirements will lock out community-oriented providers and take the ‘equity’ out of BEAD. He concluded that “it’s baffling that the [NTIA] thinks the least connected, most in need communities have the $25 billion plus that would be needed to meet these match and letter of credit requirements.”
Matching funds come in the form of cash matches or in-kind contributions, in which the match is a non-cash donation of property, goods or services which benefit the project. In-kind contributions are eligible to meet match requirements so long as they meet certain criteria.
Eligible in-kind contributions include employee or volunteer services, equipment, supplies, indirect costs, computer hardware and software and the use of facilities. Additionally, states and municipalities could contribute access to rights of way, pole attachments, conduits, easement or access to other types of infrastructure.
Expectations for BEAD match
Jorge Fuenzalida, managing partner at consulting firm JLA Advisors, told Broadband Breakfast that he expects there to be a total of $20 billion in matching funds, both cash and non-cash to be provided over the course of the BEAD program. He expects that it will be higher than the minimum $14 billion due to the subgrant bidder’s inclination to und at a higher percentage when they have a plant nearby or when the density of the targeting area is higher.
“In general, the more urbanized the area, the higher amount of match,” Fuenzalida predicted. He added that states will likely provide matching funds as well in the form of a non-cash contribution, “such as offering locations, towers, rights of way, and in some cases access to a state-owned fiber network.”
Remaining funds from some of the previous federal programs may be able to be tapped into as matching funds, he said.
Fuenzalida said that the matching fund requirement causes investors and operators to have some “skin in the game” which is a positive motivation to develop high-quality, enduring service. “It will allow entities that have already invested and committed to certain communities have a strong chance to further serve those surrounding areas,” he said. However, small operators without ready access to capital may get outbid by those with greater access to capital.
John Windhausen, executive director of the Schools, Health and Libraries Broadband Coalition advocacy organization, told Broadband Breakfast that he would not expect more than 25 percent match for the BEAD program.
Due to the nature of the BEAD program to finance builds into high-cost, hard to reach areas of the country, there is not likely to be much competition in the program. He claimed that providers will not be incentivized by competition enough to offer higher amounts of matching funds. He added that in more mountainous areas, networks will need to be built from scratch and even a 25 percent match will be a stretch.
Operating costs of these rural networks will be significant as well, he said. The Federal Communications Commission may be obligated to provide support for operating expenses down the road as networks are built in outlying areas, which it is already doing through the high-cost program.
the industry may see waivers for match requirements in certain areas that are hard to reach and so costly that the 25 percent match will discourage applicants. Yet the coalition is primarily concerned with the letter of credit requirement.
Letter of credit
Under current regulations, grant applicants must provide a letter of credit for 25 percent of project costs. This is designed to demonstrate their financial capacity to meet the program’s obligations.
Matching funds provide reassurance that providers and municipalities are invested in the process, said Kelty Garbee, executive director of Texas Rural Funders, a rural advocacy group. “But the letter of credit requirement will make it impossible for many small and rural communities to access BEAD funds.”
The CEO of provider Totelcom Communications, Jennifer Prather, told Broadband Breakfast that “this definitely favors large national providers who have the collateral and banking relationships to easily meet the letter of credit requirements.”
Where can providers find matching funds?
Procuring the required matching funds is a sizable concern for many providers. Experts have suggested a variety of sources, including counties and other federal funds.
Darren Farnan, chief operating officer of rural electric co-op United Fiber, said in a recent “Where’s The Funding?” event that counties can help network operators with the matching piece with money from other federal funds. Missouri counties used Capital Projects Fund and Rural Digital Opportunity Fund money to help with the co-op’s broadband applications.
“Getting counties involved early is extremely beneficial,” he said. He urged providers to build trust and partnerships with county officials. Widespread internet connection cannot happen without utilizing all the funding available to get networks to areas that would never have gotten it otherwise, said Farnan.
He added that electric co-ops are uniquely positioned to fund rural buildouts. Community builds – networks that have 40 to 60 homes per mile rather than the 2 to 4 addresses per mile in extremely rural areas – can be used as a funding mechanism, he said. Community builds balance out homes per mile and can fund networks in extremely rural areas.
This approach is unique to co-ops because they do not operate for profit and can use community builds to subsidize high-cost areas. Co-ops can also offset the cost of both electric and broadband builds by combining the processes and workforce in the company, he concluded.
Savid Johnson of the U.S. Department of Housing and Urban Development added that the Community Development Block Grant program is one of the only federal grant program that allows its funds to be used to meet minimum match requirements for other programs. The program provides annual grants to states and local governments to be used for economic and community development for low and moderate-income individuals.
HUD Community Planning and Development Specialist Erik Pechuekonis, said that the program “can also function as a gap filler so if you don’t get quite enough funding, we can step in and fill that role as well… We generally work well with other federal state programs.”
Connect Humanity Chief Investment Officer Brian Vo has advised providers looking at the looming matching requirement to start “with a conversation on how you want to optimize your capital.” A provider with 10,000 subscribers might be interested in more of a project or revenue-based financing where small providers may want to avoid banks completely due to recessionary and inflation pressure, he said.
Vo added that nonprofit organizations often have greater flexibility in providing funding compared to government agencies and banking institutions, but still require applicants to be knowledgeable about their financial abilities, market conditions, potential partnerships, risks and threats.
Best practices for finding where the funding is
Regardless of where the money is coming from, most experts agree that it is important for providers and potential subgrantees to start the matching process as early as possible by researching funding options and building capital stack and financing resources.
JLA Advisors’ Fuenzalida cautioned that the BEAD process is different from previous broadband programs: “It will take time and effort to identify where you want to bid, what it will cost you to serve, what will be your resulting business case including competition, and finally what level (cash or in-kind) matching funds you will require.”
Providers need to be creative and take a long-term view: “Providing broadband to these unserved and underserved geographies will provide these communities opportunities that will support them and the provider for decades.”
Chris Perlitz, managing director with Municipal Capital Markets Group, talked up the role of municipal bonds for their tax-exempt benefits for investors. Such bonds are debt obligations issued by a municipality. They are often among the most affordable means of raising capital, he said in a “Where’s The Funding?” session.
He predicted that municipally owned or operated broadband networks are the future. Because of that, financing options for the future should leverage the strength of municipalities. “Donations and grant products are usually going to flow toward municipalities much easier than it will to for profits.”
Among the various forms of financing for broadband providers include bank debt, mezzanine debt, convertible notes and equity, added David Hartin, president of ITC Holding, a private equity firm with holdings in telecommunications. Providers must be mindful of the cost per passing and return on investment when participating in grant funding, he continued.
Mezzanine debt refers to debt that offers repayment terms adapted to a company’s cash flows. Convertible notes refer to a type of bond that the holder can convert into common stock in the issuing company or cash of equal value and functions like a hybrid security with debt and equity-like features.
“Make sure your valuation expectations are right,” Hartin said. “There’s so many times that we meet with entrepreneurs and they’re thinking that they heard a valuation that somebody got a couple years ago and just make sure that’s applicable to your business because as you know, the smaller you are, the smaller the multiples will be because there’s less upside.”
Hartin suggested the providers adopt tools to help manage financial management topics such as cash flow, obtaining letters of credit, navigating the current market environment and managing construction costs. He also advised applicants to build relationships with their state broadband offices to discover additional funding sources and consider partnering with private equity firms.
Pierce Verchick, head of broadband lending at LiveOak Bank, said that banks will help providers in whatever way they can to get the money they need to build out BEAD networks, referring to ways banks can help ease letter of credit burdens.
Middle mile program match
Included in the Infrastructure Investment and Jobs Act which authorized the BEAD program was the Enabling Middle Mile program which set aside $1 billion for middle mile infrastructure across the United States. The program reported in June that it nearly doubled the amount of federal funds in private matching totaling $930 million.
In addition to the federal funds awarded, entities brought forth $848 million in other funding. That is the equivalent of 47 percent of the total project cost, or more than 91 percent match of the federal project funds.
The money will support 35 projects across 35 states to invest in the network that connects to last mile infrastructure. The match amount for awarded projects was high because of the competitiveness of the program, said CEO of telecom company Tilson, Joshua Broder. Experts estimate that the ideal investment in middle mile would be close to $7 billion, a $6 billion deficit.
Furthermore, many middle mile projects needed little subsidy to make the investment profitable for providers, added Broder. In contrast, BEAD program investments are last mile networks in unserved or underserved areas which increases cost for build out, making them less economically feasible for providers and thus limiting the amount of match funds available to the projects.
Middle mile had more bidders because it attracts more customers and users with more competition that is easier to finance due to the certainty of return and fewer operating costs in comparison to last mile through the BEAD program, agreed Windhausen.
Mark Goldstein, president at the international research center, said that the 25 percent match in the BEAD program will be difficult for providers to achieve.
