To explain an irrevocable letter of credit in plain English, anybody winning a BEAD grant must set aside almost the same amount of cash as the amount of grant matching from the day that the grant is awarded through the completion of the grant construction process.
A letter of credit to satisfy the NTIA must come from an FDIC bank with Weiss rating of B- or better for 25% of the award amount. A letter of credit is a specific kind of negotiable instrument where a bank guarantees that the bank will fund any shortfalls if a grant fails in its financial obligation. If a grant applicant fails to complete the construction of the grant, the money in the LOC would likely be claimed by NTIA or the state grant office (still unclear on the details).
Banks will not issue a letter of credit without having liquid assets or collateral equal to the amount of the LOC. That means a grant applicant must not only have enough cash or borrowing for its grant matching fund commitment, but the applicant must also set aside a large amount of hard cash as a guarantee for the LOC. The letter to the NTIA uses an example of an ISP that want to fund a $10 million project using a 75% BEAD grant. In this example, the ISP would get $7.5 million from the grant. It would need to have $2.5 million available for the matching fund. It would need to set lock up another $2.1 million for the letter of credit. That makes it incredibly expensive for an ISP to seek a BEAD grant. And FYI, this example is too conservative – grant recipients also must finance the operating costs of launching a grant project since those expenses are not covered by grants.
To make matters even worse, banks charge interest on a letter of credit because the bank must set aside a corresponding portion of its own equity to support the letter of credit. The cashed tied up by a bank for an LOC can’t be used to make other loans – so the bank must charge interest.
This is a huge problem for many reasons. Anybody but the largest ISPs will have a hard or impossible time getting a letter of credit. Most ISPs don’t accumulate cash because the best use of cash for most ISPs is to continue to build more infrastructure. A large percentage of ISPs will not have the cash available up front to support the letter of credit. Many cities and municipalities are legally barred from buying a letter of credit.
There is some question if the banking industry as a whole is willing to float over $10 billion in letters of credit for BEAD grants. The banking industry is under a huge amount of stress due to high interest rates. Banks are far less interested in making any kind of infrastructure loans today when interest rates are high – because the bank’s risk is much higher than normal. I know ISPs that have been told by their current bank that they are not interested in issuing a letter of credit – and the chance of getting a LOC from a bank that doesn’t know an ISP is slim.
There is no reason for this requirement – or at least no reason for it to be so draconian. The NTIA is insisting on a letter of credit because it doesn’t want to be embarrassed by projects that don’t get completed. This requirement is a massive advantage for large ISPs over smaller ones, but even large ISPs hate this requirement. There are many successful broadband grant programs that don’t require a draconian letter of credit. There are other ways to provide assurance to a state grant office, like performance bonds or issuing grant funds in tranches as milestones are met.
Hopefully, the press from this letter will get the NTIA to reconsider its position. The requirement for the extreme version of a letter of credit is overkill. The letter of credit is going to stop a lot of ISPs from being able to ask for BEAD funds – the local ISPs that customers prefer. Maybe most germane is that requiring a letter of credit might actually drive more projects to fail as ISPs struggle to support the interest payments on an LOC.
7 replies on “Revisiting the BEAD Letter of Credit”
Hello, Doug. I appreciate your article and your support on the removal of the LOC. Do you have an opinion on why it was written that way in the original NOFO? I brought it up at the time it was written and was told it would follow the same financial approvals as RDOF. If it stays in the existing form it will be a killer for many companies to participate.
I got a fantastic solution. Cancel the BEAD disaster entirely, take 25% of the allocated money and distribute it evenly to all ISP’s in America that have less than 2500 subscribers currently, regardless of what tech they are using. Then step aside because the wave of progress is gonna be huge.
Starting with $1,000 cash a number of years ago we self funded a successful wireless ISP covering almost 500 square miles. Many of the people we brought online had never had broadband before.
This whole thing is off the rails so far it’s incredible.
An even better one (this post cited):
https://eldotelecom.blogspot.com/2023/09/concerns-have-been-raised-regarding.html
@Frederick Pilot
That still has too many strings attached. If 3 people, starting with $1,000 can build an ISP like we have in 10 years, (the 1st 4 years we’re basically experimental) then just imagine what we could do if we had a $500,000 boost. If the people in power really want to see internet brought to the people that actually don’t have broadband now, just try it. Give us a pittance of what this country has wasted over the last 2 decades and get out of the way.
The spirit that settled this country is what drives the Wisp (and local fiber ISP’s as well) industry. We *do* things, now, today. We don’t stand around and create paper work and do magic shows for the news crews.
I have to disagree. As a taxpayer, if the government is handing out money for something I have an expectation that the recipient has credit and credability to implement. Unfortunately that means small operators have less access to the money, but if we’re talking about a small operator that doesn’t have credit and experience in building fiber networks, why exactly should taxpayers trust them?
As a small operator myself, it would be great to get a windfall to build out and I’ve built fiber networks in the past so *I* believe that would be money well ‘donated’ but at the same time, I don’t have a full fiber crew at the ready and someone dedicated to navigating local gov beaurocracies and so on.
Frankly, no strings attached money will not be spent well most of the time.
I wouldn’t model it directly off of the affordable connectivity program, but a rebate model for actually delivered services with a guarantee of continued payments for that subsity would allow companies to get their own funding and have some confidence in paying it down.
This isn’t supposed to be a gift.
My post was mostly ranting about the current disaster. I agree with Dan, a solid rebate program would take most of the grant scamming out of it. If I provide service to an area that is hard to reach, I can charge more for it because the subscriber is getting a rebate for living in a “hard to reach area” that brings his internet price down to normal rates.
The idea of using an ILOC to ensure the completion of a construction project is just a bad idea. It is not what the purpose of an ILOC was designed for. The ILOC was designed to give sellers a guarantee that the funds would be released when their goods or services met a certain set of defined contractual specifications. Maybe the government should use it correctly and release the funds to the people that actually build broadband by issuing their own contract and ILOC for completion. What a novel idea, actually using government funds to fund broadband instead of all the ancillary billions in cost mandated by the BEAD program for administration, extra labor costs, extra banking costs, and delayed construction cost increases.