The recent increase in interest rates suddenly makes it more attractive to pursue subsidized government interest rates to build broadband. Meeting debt payments is one of the primary hurdles to launching a successful broadband expansion.
We’ve been lucky over the last decade that interest rates have remained historically low. At a few points, the Federal Reserve rate almost got to zero. In a cycle that I’ve seen many times during my career, businesses get so used to low interest rates that they begin believing that interest rates will stay low forever.
But historically, interest rates have risen and dropped in response to changes in the economy. Over the last decade, the federal government made the deliberate decision to keep interest rates lower than where the market would have normally taken them.
But this year, the reemergence of inflation has forced the Federal Reserve to raise its core federal funds rate several times, and it’s up to 2.5% after starting this year at around 0.25%. There are strong indications that the rate might be raised more, although some of the inflationary pressure is starting to ease. The Federal Reserve rate is important because it is the rate at which large banks borrow from the government, and so increases in the Federal Reserve rate translate instantly into higher bank loan rates and ultimately into higher municipal bond rates.
Suddenly, federally subsidized interest rates look attractive again. The primary federally subsidized interest rate for broadband comes from the Rural Utility Service (RUS) which is part of the USDA. The RUS has always had the ability to offer low-interest-rate loans for projects that hit its target profile of bringing broadband infrastructure to rural locations. The agency currently has several billion in available loans at its disposal.
There are a few other federal programs that can offer lower rates through loan guarantees. In these situations, a borrower works with a bank, and the loan repayments are guaranteed by a federal agency, which generally translates into a lower interest rate. The HUD 108 program can guarantee loans that are used to build infrastructure in areas with lower-than-average incomes. The SBA 504 Loan Program can guarantee loans to start-up businesses, with half of the loan coming from a bank and half loaned or guaranteed by the SBA. The USDA Business and Industry Guaranteed Loans (B&I) can be used to subsidize loans that spur economic development.
Many ISPs don’t like using federal loans for a number of reasons. Applying for federal loans requires a lot of paperwork and cost to prepare, and the loan approval process is not quick. Federal loans often come with harsher requirements for borrower surety, meaning a borrower often has to pledge the entire business to get the loan. Government loans often don’t mix well with other kinds of financing since the federal loan generally requires first priority for repayment. Federal loans sometimes restrict dividends from the loan project until the loan is retired. Finally, federal loans require more reporting.
But even with all of these restrictions, the lower interest rates start to look attractive when a project doesn’t pencil in at normal bank interest rates. An RUS loan at 2% might be worth all of the extra hassle if market interest rates are 5% or 6%.
I know many ISPs who purposefully weaned themselves from federal loans over the last decade to avoid the extra work and inconvenience. This was relatively painless when there wasn’t a big difference between bank rates and the interest rates offered by federal programs.
We have no way to know if today’s higher interest rates are a temporary blip or if interest rates will stay high and return to the traditional up-and-down fluctuation that has been more historically normal. One of the bets you’re making when you pursue a federal loan is that rates will stay high and that the benefits of the lower rates will provide a long-term advantage. ISPs all over the country are likely doing the math to consider the options, and I’m sure that in many of these deliberations that federal loans are back on the table.