NTIA Modifies the Letter of Credit Requirements

For the first time in the BEAD process, the NTIA has bent to outside pressure and modified one of the grant rules. I almost labeled this blog as “NTIA Relaxes Letter of Credit Requirement,” but I still need to do more digging before I’m convinced that this makes a difference for smaller ISPs compared to the previous rules.

The specific modified  rules can be found here. Following is a summary of each change, shown in italics, followed by some of my continuing concerns.

A BEAD grant bidder can now obtain its Letter of Credit from a credit union that is insured by the National Credit Union Administration and has a credit union safety rating issued by Weiss of B- or better.

I am not sure of the genesis of this idea, but this opens the door to more financial institutions that can provide the Letter of Credit. There must be some subset of potential grant applicants that asked for this. A lot of the BEAD projects are going to be large, and I have to wonder how many credit unions will be willing to tie up cash reserves of many millions of dollars for a Letter of Credit. Financial institutions must keep any cash pledged to a Letter of Credit in reserve, meaning that money can’t be used to make other loans. That’s why the interest rate and the cost of a Letter of Credit are substantial – because money pledged to a Letter of Credit can’t be used to make other loans.

A grant bidder will not have to provide a bankruptcy opinion letter if they obtain a performance bond for 100% of the awarded grant amount.

One of the big gotchas for using a Letter of Credit is that a grant applicant must also obtain a legal opinion that the Letter of Credit will not be considered to be property if the grant applicant undergoes bankruptcy. That’s a hard legal opinion to obtain since bankruptcy courts tend to snag every asset with any perceived value. This is not a meaningless provision since large ISPs like Charter, Frontier, and Windstream have gone through bankruptcy.

The more important change is that a grant applicant can substitute a performance bond for a letter of credit. However, the performance bond is for the amount of the award. In the typical BEAD grant, the performance bond would have to cover the 75% grant, while the Letter of Credit covers only the 25% grant matching. I’m going to have to do some checking, but a performance bond that covers a larger dollar amount might not be much cheaper than a Letter of Credit that covers only the matching.

Additionally, a grant applicant must have proof of the performance bond before applying for the grant. This ignores the way that companies that give a performance bond operate. I have never worked with one who would give a bond for a theoretical project – only for an actual shovel-ready project that already has the funding and subcontractors under contract. It might be extremely difficult or impossible to get a performance bond for a theoretical grant project that might never come to fruition, or that might be materially different than what was contemplated when the performance bond was created.

A grant winner will be able to ratchet down the letter of credit as they meet specified buildout milestones. A grant winner using a performance bond will have the same option to reduce the size of the bond for meeting specific buildout requirements.

This sounds great in that the Letter of Credit or the performance bond can be reduced in size as the project gets constructed. However, this ignores the way that financial institutions work. Changing a Letter of Credit will likely be treated by a bank as a whole new transaction. They are going to do a complete new review of the borrower and the project and will charge a significant fee to make this change – much like having to undergo a credit check, pay for a new inspection, and pay points when you refinance a home loan. I’ve never been part of a project that reduced the amount of a performance bond, but I have to imagine the process is similar.

It is good to see the NTIA willing to make changes. They have been hounded by a wide range of industry folks and politicians to make changes to the Letter of Credit. Unfortunately, the change that was really needed was to get rid of the Letter of Credit requirement since it strongly favors big ISPs over small ones. I don’t want to sound skeptical, but I still see red flags in the practical application of the new rules that will be expensive and perhaps impossible for anybody but giant ISPs to meet. This feels more like a band-aid than a fix.

6 thoughts on “NTIA Modifies the Letter of Credit Requirements

  1. Similarly, New York’s new BEAD proposal (Nov. 7) has adopted a “reimbursement model,” requiring all BEAD grantees to complete the build-out and begin service prior to receiving grants. This seems tailor-made to favor large ISPs with deep pockets and capital access, who can front the construction costs over the expected 4-year buildout. Would love your and other commenters’ thoughts on whether other states are taking this approach.

  2. The New York State proposal claims its reimbursement approach is “similar to that employed by the federal government in broadband grant programs.” I’m skeptical to say the least – have to assume that either their proposal’s wording was a mistake (requiring grantees to “prequalify” by next April, even before applying, by showing they have the financial resources “to construct the network and begin service prior to receiving grant award funding as reimbursement for eligible expenses”) was a mistake, or was designed to clear the field of applicants beyond the big telecoms.

    I’m drafting a public comment on it (due Dec. 6). If you or any commenters could point me to evidence the federal model is not as described above, that would be helpful – i.e., federal broadband funding models that pay grants up front or as partial progress payments on hitting agreed milestones (like any construction contracts I’ve seen).

    • Lot’s of States are requiring ISPs to pre-qualify. that’s an attempt to get the paperwork portion of the grant out of the way early. That doesn’t mean the have to have the wherewithal to cover the full cost of the grant – unless that is specifically identified elsewhere

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