Broadband builders contend with BEAD's letter of credit rule

As states prepare to roll out Broadband, Equity, Access and Deployment (BEAD) program funding they will have to ensure that providers and local stakeholders are educated on the process of being approved to build with that money. Notably, the program’s letter of credit requirement will still be a must-have for those who want to work through BEAD, despite some pushback on that rule.

At last week’s Mountain Connect 2023 in Denver, Matt Schmit of the Illinois Broadband Advisory Council said that his office will have to do outreach so that providers understand the letter of credit is an additional requirement that might not have been there for other grant opportunities.

“I think awareness is the key there, with letters of credit,” said Schmit.

Under the existing guidelines of the $42.5 billion BEAD program, potential grant seekers are required to provide the National Telecommunications and Information Administration (NTIA) with a letter of credit from a bank as evidence that they have at least 25% of the grant dollar amount in a liquid cash bank account.

During a Fiber Broadband Association (FBA) webinar this spring Philip J. Macres, a telecom lawyer with Klein Law Group, explained that the letter of credit requirement for a BEAD application, whether the applicant is a provider or municipality, is a “straightforward process.” (Despite hosting the webinar, a representative for the FBA told Fierce it “has not issued a position on the matter” of letters of credit for the BEAD program.)

The real issue is that the letter of credit applies on top of NTIA's 25% match requirement for providers – and that could start to add up.

For example, a $20 million broadband construction project would require a $5 million match (25% of the total project amount) and a $3.75 million letter of credit (25% of the $15 million grant amount), so the company or municipality would need to have about $8.75 million in a cash account at the time the grant was awarded.

"And NTIA intends to strictly impose this requirement with limited exceptions," Macres noted.

Elizabeth Bowles, president of Aristotle, an ISP headquartered in Arkansas, during the webinar said this will disproportionately affect smaller providers, “the very providers that have been going out in rural America and deploying.”

The letter of credit is "a singularly bad way to go about this," Bowles added. "I get what the government is trying to accomplish here. This is taxpayer money, and they're trying to make sure they're giving it to good actors, to financially solvent companies. But at the end of the day, it's depriving companies of working capital.”

Plus, providers can add to their bill the 1-5% annual fees on a letter of credit that will have to be paid every year during a five-year BEAD buildout.

For a company that might be asset-rich but cash-poor, this is a "pretty hefty lift," said Bowles.

NTIA stays firm, but open to ‘alternatives’

Despite pressure to change the BEAD program’s letter of credit requirement the NTIA has not backed down much. However, it has left some room for “alternatives.”

Though funding allocations for each state were announced in June, the BEAD statute still requires states and territories to ensure that "subgrantees have demonstrated financial and operational capability." NTIA proposed in its Request for Comment—and ultimately adopted in the BEAD Notice of Funding Opportunity (NOFO) following public comment—"that potential subgrantees obtain a letter of credit to meet this statutory requirement,” an NTIA representative told Fierce.

“Ensuring that these funds flow to entities with proven track records of financial and operational capability is important for taxpayers to receive the networks that they’ve been promised,” the rep added.

“It is critical to the success of the program that subgrantees have the ability to see their deployment projects through—not just to the end of construction, but on an ongoing basis as a service provider delivering affordable, reliable Internet service. This is part of our role as good stewards of taxpayer dollars.”

However, the representative said the NOFO acknowledges that in some cases an alternative method may be appropriate, such as for municipalities who can access capital in the bond market, and urges states and territories to “accommodate these differences in establishing their requirements.”  

The NTIA rep concluded, “The NTIA invites states and territories to propose alternatives ‘if they are necessary and sufficient to ensure that the program’s objectives are met.'"