Will There Be a Credit Crunch?

ISPs are collectively going to be borrowing huge amounts of money over the next year as a result of the various state and local grant programs. For example, the $16.4 billion RDOF grant likely will drive ISPs to borrow many billions to match the grant awards. The federal ReConnect grants and the numerous State grant programs will also drive significant new debt.

I’ve followed the banking industry for decades and I’ve seen how banks react to economic stress. In my adult lifetime, I’ve witnessed several major economic downturns. The economy took a major downward turn in 1973-75, in 1981-82, after the dot-com crash in 2001, and most recently in 2007-09. In each of these cases, banks reacted by tightening credit, meaning that it became harder, or even impossible to borrow money.

The COVID-19 pandemic is different than these other recessions in that the reaction to the virus crashed an otherwise healthy economy. The pre-pandemic economy was showing some signs that the decade of growth was slowing, but the economy at the beginning of this year was in relatively good shape. That pre-pandemic economy should easily have been able to support the loans needed for a major expansion of broadband.

The pandemic has stressed banks in unusual ways. For example, banks have generated a huge amount of loans to small businesses to support the Paycheck Protection Program that’s part of the recent stimulus relief plans. While these loans are ultimately backed by the government, they’ve eaten severely into bank cash reserves.

Banks are also seeing a lot of bad debt due to the pandemic. Tens of millions of people are currently out of work and many are having trouble making debt payments on mortgages, car loans, student loans, credit cards, you name it. Huge numbers of businesses have shut their doors, or even if still open have curtailed or stopped making rent or mortgage payments. I’ve read numerous predictions that there will be a business real estate crisis soon as landlords react to suddenly vacant buildings.

Banks have already started to react in ways that you would expect during any downturn. Small businesses that are still open have had lines of credit frozen. It’s gotten harder to apply for a home mortgage. Banks have already cut back on lending new money to small businesses.

During past downturns, banks also curtailed loans to larger businesses. I can remember several times when industry lenders like CoBank and RTFC either stopped lending or became far more selective in making loans. Just a decade ago there was a short period of time when even Fortune 500 companies had trouble borrowing money.

It’s really hard to predict bank behavior right now since this is not a ‘normal’ recession. Underneath all of the current ugly financial news is a hope that the economy can spring back to life if medical science develops a vaccine or effective treatment. Unfortunately, there are parts of the economy that are not likely to come back quickly, or even at all. Many of the small businesses that are still shut due to the pandemic are likely not coming back. We’ve seen a big string of major retailers fail, and that is going to cascade to kill shopping malls and shopping districts. A lot of businesses say that they intend to continue with work-from-home initiatives that were forced upon them during the pandemic – and that means a lot of empty business real estate.

What matters most to ISPs right now is what the banking industry is going to be like by the end of this year. What happens if many of the ISPs looking for matching funds for grants are unable to borrow? How might the FCC react if billions of grants fall onto the floor due to a lending crisis?

I don’t have a crystal ball and this blog is not meant as a prediction that borrowing is going to dry up. But I’ve seen enough recessions to know that lending is not going to continue unchanged. Anybody thinking about accepting large amounts of grants needs to think about a back-up plan if it becomes harder to borrow. The FCC and ISPs have all assumed that that matching funds will  be readily available for anybody that lands a large grant. It’s historically been relatively easy to borrow for projects that are funding largely by grants – but this is definitely not normal times.