Bandwidth Hawk

There is major hesitation that seems to be building among lenders when it comes to financing unfunded portions of BEAD deployments.

By: Steven S. Ross, Broadband Communities

Thanks to delays in the BEAD program’s money distributions, there are fewer addresses to be served. Thanks to new satellite technology, more of the current unserved will be handled from low Earth orbit. But I’ve discovered major hesitation from lenders who would finance builds beyond what BEAD will give bidding deployers.

A solution? NTIA could allow states to use some of their excess BEAD grants to guarantee repayment.

Let’s dive in

As the Broadband Equity, Access, and Deployment (BEAD) “Benefit of the Bargain” Round drew to a close in July, expectations that low Earth orbit (LEO) satellite bids would play a prominent role were partially fulfilled, but point-to-point wireless expectations were apparently not.

Overall, the number of bids by fiber providers seems slightly lower than in the cancelled first BEAD round, and fixed wireless deployers seem to be a bit more numerous in preliminary counts.

The reasons are many. One reason is outright fear of LEO – with its low up-front, on-the-ground deployment costs and its first crack at consumers who might otherwise wait for terrestrial deployers no doubt haunting the halls of wireless and fiber internet service providers.

But confidential and frank conversations with many financiers and prospective deployers suggest the biggest reason is lack of available financing at an acceptable price. The reasons for tight and expensive funds include dollar weakness, high interest rates somewhat independent of Federal Reserve’s short-term rate policy, and uncertainties over spectrum availability – all reinforced by the belief that almost all federal policies that affect money supply are going in the wrong direction.

The Trump Administration has been aiming for states to complete a slapdash rural broadband fix under BEAD and return perhaps as much as half the $42.5 billion originally appropriated. But wouldn’t it make more sense to use some of the emerging surplus to, in effect, guarantee some of the financing load?

Why not?

The result would be faster deployment, lower ultimate costs, and thus lower customer costs. It would lead to better broadband quality, and better availability.

Once loans are repaid, the bulk of the “guarantee” funds could then be returned to the federal government to help lower the deficit.

As far as the physical issues are concerned, building terrestrial wireless should have an advantage, especially in rural areas where fiber has come to established towns but has not extended to surrounding areas.

That’s because the revised National Telecommunications and Information Administration (NTIA) rules will accept systems that can handle 100 Mbps downstream, and 20 Mbps upstream, for 10 years.

That’s not a stretch for cellular or point-to-point wireless these days.

Potential funders, however – namely, the folks who will have to supply the money to cover what BEAD does not – worry that demand, and thus future costs, will be higher.

Money is tight

What we loosely call “Wall Street” (money-center banks, equity funds, packagers of foreign cash, folks who follow the national carriers’ stock and balance sheets) say money supply, at least for big projects, is drying up.

Deployers and potential deployers looking at BEAD opportunities also say money is tight, but for different reasons.

On the purely financial side, the worries include:

• A weaker dollar
  The dollar has lost about 12 percent since January against the euro. That adds currency valuation risk. Beyond the obvious, that a weaker dollar makes imports more expensive, it also makes inflation more likely by giving American producers a chance to remain competitive by raising their prices. Tariffs add even more inflation to the mix.
• Longer-term interest rates have stayed high
  Longer-term interest rates even increased despite the Federal Reserve Bank (FRB) reducing short term rates a bit. This is partly due to inflation fears and partly because the sheer size of the FRB balance sheet has shrunk since it increased nearly five-fold due to the recession that started in 2008.
• High FRB rates
  High FRB rates (4.25% to 4.5%) are not attracting much new money from dollar holdings abroad. In part, that’s likely due to our expanding national debt and our continued deficit spending which, aside from spooking the lenders, is soaking up some of the capital.

Other factors …

• Tariff and labor issues persist
  Unsettled tariff issues and labor shortages, due in part to deportation of undocumented persons, green card holders, and other construction workers, are sure to cause deployment delays and rising costs.
• Other lingering issues
  Additionally, there are unsettled issues over exactly what would be counted as an asset to back new loans. Plus, existing lenders have their own reason to be upset about the Trump Administration’s desire to maintain and expand unregulated competition from crypto currency, but it does drain money from the potential pool of funds going into productive investments. Whatever one crypto investor gains and invests productively, it is at the expense of another investor who loses.

Crypto is often compared to the commodities futures market but there is a critical difference.

Commodities shift risk to those who can accept it. For instance, a farmer typically sells part of the expected crop by spring, leaving the purchasers of these “futures” to possibly benefit from higher prices at harvest time.

The farmer, already at risk from floods, bad weather, war, and pestilence, is happy to cut the risk by losing some of the possible upside. The banks that lend the farmers money are also happy to cut their risk.

Pure futures trading is a zero-sum game, like crypto, but the overall futures market is positive for the economy as a whole.

What we should be doing

Over and over, I hear from my foreign friends in finance that a wise US fiscal policy would be to raise taxes, cut government spending, and welcome most immigrants to grow the economy faster.

That would make the national debt appear smaller in proportion to gross domestic product.

Everything we are doing with regard to those three issues, however, is opposite of what should be happening, they say.

Keeping marginal tax rates low even reduces the incentive behind tax shelter schemes, such as everyday domestic retirement savings.

In this environment, only large, profitable existing operators have a clear path to financing. But even for them, on the basis of comments to me, Wall Street seems to fear that one existing practice will become less effective if BEAD succeeds.

The practice in question? National carriers cutting prices where there is competition and raising prices where there is not.

Traffic increases

Online traffic volume continues to rise, at roughly 2 percent a month, and maybe it would rise faster in rural areas if not constrained by existing technology. This 2 percent per month is a bit higher than the 12 to 15 percent annual rise of past few years, apparently due to new uses for broadband.

That means broadband traffic volume is still doubling every three or four years. Doesn’t that make the new 10-year goal of 100 by 20 Mbps foolishly low?

Stability, low latency, and upstream bandwidth more closely matching downstream is also a bigger deal, due to the rise in teleconferencing for so many things, along with virtual schooling and conferences. Telemedicine and gaming are also main contributors.

New uses, such as AI, remote surgery, and precision farming add to that bandwidth/reliability equation. More on all that, soon, in a future article.

That means broadband becomes even more central to our economy, especially in rural areas, which would seem to justify fiber, or redundant P2P and cellular wireless, or satellite use as either a primary or a backup.

Thus, spectrum sales and uses become more critical as well. But the Trump Administration seems focused on maximizing current revenue from spectrum sales, rather than looking well into the future.

Spectrum issues

The ‘One Big Beautiful Bill’ (OBBB) sets rules for auctioning the last earthly spectrum available under the laws of physics – an auction expected to raise $88 billion by selling mainly a bunch of currently unused thin spectrum slices. OBBB makes it more difficult to auction off the Citizens Broadband Radio Service (CBRS) band (3.55 to 3.7 Ghz) used freely by many WISPs and licensed in a 2020 auction to some cellular providers mainly to sell protected “local” private networks to educational, health care and resource extraction firms.

The same rules now apply to the so-called 6 Ghz band (5.9 to 7.1 Ghz). But, as with CBRS, OBBB does not outright protect them from the coming spectrum auction.

The 6 Ghz band is also used (for free) by WISPs, but its big use is for consumer and local Wi-Fi (especially Wi-Fi 7 and soon, Wi-Fi 8). Fixed microwave links for public utilities, cell-tower backhaul, and even phone service (especially in rural areas) also use the band.

The bill does carve out two military bands that are nearby but cannot be considered for auction (3.1 to 3.45 Ghz and 7.4 to 8.4 Ghz).

What’s next?

The fact that monthly customer charges for satellite service are likely to be far higher than for fiber or terrestrial wireless does not, so far, seem to matter to Secretary of Commerce Howard Lutnick.

The Trump Administration is still counting its expected budget-cutting savings.

It is easy to see that in the long term, setting up state-based loan guarantee funds with the spare change would cut the national debt more in the long run, lower interest rates for deployers and thus allow lower user fees and speedier deployment–especially in rural areas.

With the appointment of Arielle Roth to run NTIA finally confirmed by the Senate, there is still hope.

Check back soon for more from Steven S. Ross, with a report about underreported emerging broadband needs.

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