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22 April 2022

Proximo Weekly: Is the US municipal FTTH market about to take off?

Federal dollars look set to stimulate a boom in US municipal FTTH projects. But the market still has a long way to evolve in terms of public-private financing templates.

The US has been slow to develop an adequate amount of last mile fibre broadband or fibre to the home (FTTH) because it has simply not been economically viable in non-urban areas without significant government subsidy. For the first time, these long-awaited subsidies appear to be imminent with President Biden’s Infrastructure Investment and Jobs Act (IIJA) set to provide $65 billion in funding for broadband infrastructure with the goal of filling in the gaps left by the private sector.

Within that funding is a dedicated $42.5 billion for the Broadband Equity, Access, and Deployment (BEAD) Program, which gives money directly to the states to use at their discretion. The BEAD Program has stirred great anticipation, particularly in the municipal FTTH market, that government subsidies may create a roadmap to make otherwise uneconomic sectors of the market, economic.

But how will municipal governments and the private sector collaborate in order to deliver this? What challenges will they face in doing so? And how bankable is the municipal FTTH market on the commercial debt side?

A myriad of market drivers

Municipal broadband in the US has grown almost 600% since 2018. Municipal networks differ from ISPs in that they are controlled locally by governments or public utilities and are more focused on expanding access and affordability for residents than in making a profit.

A third of the roughly 150 million homes in the US currently have access to fibre. The remaining two-thirds are split between approximately 50 million homes deemed to be economically viable and the rest situated in far less densely populated areas and as a result require a government subsidy in order to be economic. Private capital is actively pursuing the supposedly viable third, leaving the final third as the focus for municipal FTTH.

In the wake of the Covid-19 pandemic, the necessity for broadband for remote work, remote learning and virtual social interaction has become prevalent and probably permanent. So FTTH has effectively taken on essential asset status. Municipal broadband networks are synonymous with so-called ‘open networks’ seen elsewhere in the world. Bank Street has been involved in over $500 billion of digital broadband infrastructure and services transactions, including open network transactions in international markets. Examples include the KKR transactions in Chile and Columbia involving Telefonica’s assets.

Richard Lukaj, founder of Bank Street, sees “open network models as a very good way to play broadband infrastructure growth dynamics in such markets. In the US, however, there just haven't been many case studies with similar models, which means players have not simply been willing to build a network layer infrastructure and open it up to all carriers and VARs. Strategically, in the US we still see service providers looking to have both the retail customer ownership as well as the underlying network infrastructure.”

The digital divide

Given that population density is central to making an FTTH build economic, urban areas are and will continue to be, at least in the near-term, the main point of investment for the private sector. Kemal Hawa, a shareholder in Greenberg Traurig Law, is confident that "in the next five years, the market will see a huge amount of deal flow and investment in last mile facilities in and around major metropolitan areas."

But "because of how capital intensive fibre builds are, we cannot expect significant investment in FTTH in rural, underserved and impoverished areas absent government intervention. Addressing the digital divide is even more important today given the pandemic, and how remote work and learning have become the new normal. Indeed, many have begun to refer to broadband access as the fourth utility – as central to our lives in many ways as electricity or water," adds Hawa.

Government intervention in the form of subsidies is critical to helping bridge this divide. But how viable and interesting to debt lenders these markets are is difficult to measure until there is a clearer picture on exactly what the broadband stimulus bill will entail and how it will impact FTTH business plans.

That said, there is already a growing move towards alternative municipal FTTH solutions, which include bundling deals to create economies of scale. Chatter in the market is building in terms of rolling up small cable companies and rural telcos, which is unsurprising given the obvious synergies and benefits of centralising functionality: plans to bundle FTTH deals have been talked about for decades, but there now appears to be real traction.

The P3 solution

Given the historical shortcomings with public financing and operations of telecommunications networks, when it comes to so-called municipal broadband initiatives, public sources of capital should take caution from past experiences.

Lukaj believes “a better way to think about municipal broadband opportunities might be through the lens of either public private partnerships (P3) or an open network formula for geographies with such low densities as to not be able to sustain more than one fibre network provider. History suggests that simply giving money to government organizations to build infrastructure and then commercialise the assets to provide customer service is not generally a good idea.”

Many have argued that lack of expertise makes governments ill-suited to take on the tasks of operating and maintaining commercial broadband networks and that failure comes at the expense of taxpayers.

The private market is eager to invest in FTTH assets, but only with the help of government subsidies – municipalities coming in and funding say 30-40% of capital costs relieves the risk burden on private parties. Without federal or municipal dollars, investing in FTTH businesses and projects that are more rural is simply deemed too risky.

Debt side creativity

Almost all FTTH projects are financed with a combination of equity and debt. The credit side of the market is already banking these projects, but in most cases through backing equity dollars with a solid business plan in a more development style finance.

The main challenge facing the debt side when it comes to FTTH is a severely delayed cash flow. This is due to the long-term nature of the projects, as with any fibre development project, but more exacerbated in FTTH where build-outs can range from a minimum of three years up to 10 for construction, at which point customers still need to be onboarded before revenue can start being generated.

Sources in the market report that most FTTH projects are only expected to break even in year seven, as there is a distinct absence of significant cash flow until that point. It is notoriously difficult to raise leverage in the early stages of a project and whatever leverage is raised cannot be serviced because cash flow is absent for seven or so years.

However, despite the understandable hesitancy, appetite at the debt end of the spectrum is increasing, with credit markets looking for creative ways to get involved when it comes to cash flow maturation.

In some cases lenders have looked at the mature elements of the FTTH markets and have lent as a multiplier of the cash flow from those mature markets, recognising that the less mature markets are likely to emulate the early, more mature markets. Lenders are willing to lend considerably higher than the consolidated cash flows of the business might otherwise dictate. This level of creativity stems from an acceptance, even on the credit side of the market, that this trend line is real and proven.

Ready to launch

There is huge potential for the US FTTH market, but Lukaj notes that commissioners and legislators in the US will need to be careful not to squeeze out or damage private capital investments by flooding the market with capital in geographies where it isn’t needed: “Distributing the $69 billion committed to broadband infrastructure in the Infrastructure Investment and Jobs Act homogeneously is potentially reckless as it could create a supply demand imbalance, the likes of which we haven’t seen since the dot com bubble.

However, this sentiment is not necessarily replicated across the market – Hawa says he is seeing more deals than he has ever seen before in FTTH. Discussions on building out the FTTH market have been happening for over 20 years but with home working becoming more prevalent, and backed by the imminent arrival of government subsidies from the IJJA, this time the feeling in the market is overwhelmingly optimistic in terms of expected investment in the municipal market for FTTH.

Nevertheless, concerns over FTTH’s economics are likely to remain, especially given the challenge of moving into the second tier and rural markets, and deals will be difficult and complex in the early stages. But once more clarity is gained on the broadband stimulus bill and how its funds are going to flow, a P3 template for deals involving equity and debt will undoubtedly evolve.


Selected news articles from Proximo last week



OCI launches Iowa Fertilizer muni refinancing

Global fertiliser producer OCI has launched an $854 million tax-exempt refinancing of its Iowa Fertilizer plant.



Telecom Italia looking for SACE-backed debt

Telecom Italia is said to be trying to negotiate a €3 billion credit line with a pool of banks and SACE in a bid to bolster its balance sheet after reporting a record loss.



REP to develop 900MW wind farm in Queensland

Renewable Energy Partners (REP) has announced the development of its fourth Australian wind farm – the 900MW, 166-turbine Proserpine wind farm located north of Mackay, in Queensland.



SWPC issues shortlists for 3 IWTPs

The Saudi Water Partnership Company (SWPC) has announced the shortlists of pre-qualified bidders for three independent water transmission pipeline (IWTP) projects.


Cerro Dominador gets environmental nod for revised solar PV scheme

Cerro Dominador has secured environmental approval to scrap plans for a 110MW concentrated solar power (CSP) plant, and build a 500MW PV complex in its place at a site in the Chilean region of Antofagasta.

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