I’ve recently been working with ISPs who are getting worried about what high interest rates might mean for the upcoming BEAD grants. Interest rates keep creeping upward to levels we haven’t seen in decades. Just last week, I saw that home mortgages are now at 8% – and infrastructure loans are only a little less expensive.
For any ISP that was going to borrow most of the BEAD matching funds, the increase in interest rates can be devastating. When BEAD was first announced in 2021, I had clients getting infrastructure loans at 4% or less. There are banks now talking 6% to 7%, with a good possibility that the rates will be even higher next year when it’s finally time to make the final go/no go decision to participate in BEAD.
Except for some exceptions for high-cost areas, most BEAD grants will be capped at 75% of the cost of the infrastructure. However, the NTIA has given instructions to states to stretch BEAD dollars by rewarding applicants who will accept less than a 75% grant. This means that many BEAD applicants will be borrowing to cover more than 25% of the cost of the infrastructure.
BEAD applicants also have to finance other costs that are not covered by the BEAD grants. BEAD grants only pay for broadband-related infrastructure. The grants don’t pay for vehicles, computers, furniture, and any other similar assets. BEAD also doesn’t cover expenses, and a BEAD applicant must cover the labor and other start-up costs for launching a new market. These expenses must be supported by the ISP until revenues grow to cover operational expenses.
It’s hard to stress the importance of interest rates on the viability of a rural business plan. The areas where BEAD will be built are rural, by definition, and will not generate a lot of monthly cash, even when completed and mature. Many of the business plans I’ve reviewed barely cash flow with a 75% grant and the interest rates we saw in 2021. In many business plans, interest expense is one of the major expenses in the early years of the roll-out.
There is another BEAD issue that is also dependent on the interest rate. The guaranteed letter of credit will be more expensive as interest rates increase. For ISPs that will borrow the matching funds, the base loan and letter of credit are a double whammy.
ISPs have a tough choice to make. It seems likely that interest rates will not stay at the high levels we see today. Interest rates may still rise as the Federal Reserve continues the fight against inflation. But historically, high interest rates have always returned to lower levels eventually. It doesn’t seem likely that interest rates are going to drop as low as what we’ve seen in the last decade, since for much of that period the interbank lending rate was near zero.
The hard question for an ISP who is borrowing at high rates is if and when interest rates will drop and if they will be able to refinance BEAD loans. I’ve lived through periods in the past where borrowers faced this same dilemma. Borrowers need to be prognosticators and make some guesses about the future of interest rates. If an ISP believes that rates won’t drop enough to ever be affordable, it’s time to pass on taking grant funding. But if future refinancing seems likely, a borrower has to guess when rates may drop and become affordable.
Interest rates are another of the many BEAD issues that are going to force some ISPs to think twice about taking the grants. Higher interest rates don’t directly affect ISPs that are planning on using equity, but even that’s not entirely true since equity investors consider market financial conditions as part of deciding where to invest.
There couldn’t have been a worse time for the still-increasing interest rates for anybody considering BEAD. The hardest question to answer is what the interest rates might look like in 2025 and 2026 when most of the money will be drawn to pay for construction. If rates start to return to sane levels by then, then the situation will not be as dire as discussed above. But who has the crystal ball that will predict interest rates over the next three years?