A New Source of Financing

Buried deep in the Infrastructure Investment and Jobs Act is the opportunity for broadband projects to use a different form of financing. Section 80401 of the new law allows for the use of private activity bond financing for qualified broadband projects.

For those unfamiliar with that terminology, a private activity bond is a bond issued by somebody other than a government entity. Rather than borrowing money from a bank, bonds are sold directly to investors. Most bonds are purchased these days by Wall Street bond funds, although individual investors can also buy bonds.

It’s an interesting new form of financing that has never been easily available to commercial ISPs before. Before talking more about the bond process, I want to discuss what the law means by ‘qualified projects”. This bond funding can only be used for projects that fit the criteria for broadband projects that are covered by the other provisions of the IILJ. Specifically, the bonds can only be used to finance a project that:

A.  Is designed to provide broadband service solely to 1 or more census block groups in which more than 50% of residential households do not have access to fixed, terrestrial broadband service which delivers at least 25 Mbps downstream and at least 3 Mbps upstream, and

B.  Results in internet access to residential locations, commercial locations, or a combination of residential ad commercial locations at speeds not less than 100 Mbps for download and 20 Mbps for uploads, but only if at least 90% of the locations provided such access under the project are locations where, before the project, a broadband provider did not provide service, or did not provide service meeting the minimum speed requirement described in paragraph A.   

This means the projects can only be used for areas that have at least 50% coverage of homes with current broadband of 25/3 or less. That’s likely to mean that this bond funding is going to have a relatively short shelf life – once BEAD grants are done, there may not be a whole lot of the U.S. left that will meet this test. The bond option is clearly aimed at providing the matching funds for the upcoming BEAD grants. But this law would allow bond financing to be used for projects funded by state broadband grants or projects partially funded by ARPA funds.

There is an interesting hoop to jump through. Anybody who wants to use the bonds must query all incumbent providers in the grant area to see if they have plans to build a gigabit-capable network. There is no guidance on what happens if a current ISP says yes. This funding also is not available for incumbents to use in existing service territories.

What are the potential benefits of this funding option for an ISP?

  • It’s easier with bonds to finance projects over a longer time. It should be possible to get 25 or 30-year funding through bond financing.
  • The bonds can provide 100% financing, whereas many other funding sources require at least some equity.
  • Bond financing can also provide a cushion for the first few years by having no debt payments. This is done by deferring principal payments and by pre-borrowing the interest payment for the first few years of a project.
  • It’s possible that bond funding might have a lower interest rate – but that is strictly going to depend on the creditworthiness of the borrower. For instance, a cooperative with a great balance sheet might get a rock bottom interest rate while somebody else might pay a high rate.
  • There generally is less ongoing reporting as long as the borrower is able to make bond payments.
  • Finally, there is a chance that the bonds could be tax-free for bond purchasers, but that would be subject to IRS rules outside of this new law.

There are a few other provisions of the rule worth noting. Getting bond funding requires structuring the bond through a conduit borrower. That means that a state, a county government, or perhaps somebody like a government-based economic development agency would have to agree to sponsor the bonds. The government entity would have no ownership of the bond project, but would instead lend its name to the project to enable a project to qualify for using the bond market.

For those not familiar with the bond process, a borrower would work with a bond agent expert who is familiar with bond financing. You’d create an official statement, which is essentially the offering document that is shown to prospective bond buyers that would describe the project and describe the benefits and risks. This is similar to a document that is created by public companies before selling stocks to the public. The bond agent would circulate the official statement and solicit purchase offers from bond buyers. The bond market can work quickly, and assuming it’s an attractive bond offering that meets industry expectations, the bond sale is generally transacted within a relatively short period of time.

This is something worth considering for somebody who is looking to fund the matching portion of the various grants that are floating around the industry. It’s an interesting alternative to a traditional bank loan. The main reasons to consider it include 100% financing, possibly lower interest rates, a long term for repayment, and a period upfront with no debt payments. For some projects, those items can make a big difference in the willingness to pursue a grant.

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