4. CASF Revolving Loan Program
SB 1040 expanded the CASF to establish the Broadband Infrastructure Revolving Loan Account. Pursuant to Pub .Util. Code § 281(e), funds in the Loan Account "shall be available to finance capital costs of broadband facilities not funded by a grant from the Broadband Infrastructure Grant Account. The Commission shall periodically set interest rates on the loans based on surveys of existing financial markets."
The Commission will disburse funds from the CASF Loan Account only as supplemental financing for projects that are also applying for funds from the CASF grant account. The CASF loan account will cover a percentage of the project's total costs that are not funded by the grant account. Funds in the loan account will not be used to finance stand-alone projects not funded by the grant account.
4.1. Loan Eligibility Requirements
As previously noted, the purpose of the Loan Account is to finance capital costs of broadband facilities not funded by a grant from the Grant Account. SB 1040 established the Loan Account as an additional option for funding supplemental to the Grant Account. Therefore, we hereby establish the Loan Account within the CASF Program as a supplemental funding venue for qualified projects and applicants under the Grant Account and not as a sole source of funding to a project.
We adopt updated applicant and project eligibility criteria for the Grant Account for purposes of qualifying for the CASF loan account. Appendix 1 of this decision outlines the eligibility requirements.
Applicant and project eligibility requirements for the CASF infrastructure grant account and loan account will essentially be the same since both accounts are specifically used to finance capital costs of broadband facilities. Adopting one set of requirements for both accounts will provide an efficient and simplified way for applicants to submit an application and avoid complications in determining what is needed for each type of funding. The Commission will award funds from the Loan Account only as supplemental financing for projects also applying for funds from the Grant Account. The maximum percentages of project costs to be funded are set forth in Section 3.1.1 above.
4.2. Financial Statement Requirements
In setting up the financial eligibility criteria for applicants, it is the Commission's responsibility to lend to entities that are capable of repaying its loans. Applicants will be required to provide specific financial documents as listed below.
A. CPA-Audited Financial Statements for the last three years, to include:
· Balance Sheet
· Income Statement
· Statement of Cash Flows
B. Pro Forma Financial Forecast over the life term of the loan (i.e., 5 years) that includes a list of assumptions supporting the data. For projects applying for a grant only, the pro forma financial forecast will be over 5 years. Future projections must include the following financial statements:
· Balance Sheet
· Income Statement
· Statement of Cash Flows
C. Annual Earnings Before Income and Tax (EBIT) projection over 5 years.
D. Schedule of all outstanding and planned debt.
E. Collateral documentation, including depreciation schedule.
Frontier comments that for applicants that are part of a larger corporate entity, submission of parent company financial statements should be applicable since individual subsidiaries may not have audited financial statements.
Camino Fiber comments that requirement that the applicants provide CPA audited financial statements for the last three years should be dropped as it would be impractical for startup infrastructure providers. Instead, the requirements should be for current financial statements and, if available, for the prior two years.
Verizon states that the proposal to require financial reports and projections for all projects will likely eliminate applications for smaller projects. Verizon recommends that it be eliminated. They believe this requirement should not apply to projects that augment existing infrastructure to provide broadband to an underserved or unserved area (e.g., Resolution T-17322 which approved a grant for Frontier's expansion of DSL is an example of a CASF project that should be exempt from this requirement).
SEDCorp questions the purpose of requiring annual EBIT projections over five years, especially since complete pro forma income statements must be submitted. SEDCorp claims the use of EBIT as a measure of the financial health can be misleading, especially for technology companies. SEDCorp recommends that applications simply be analyzed to determine their ability to repay debt and to demonstrate a minimum Debt Coverage Ratio of 1.5 for the life of the loan.
SEDCorp also claims that a requirement for 20% equity at the start of a project will not necessarily "ensure" the financial sustainment of an applicant. Cash flow services debt while equity secures the debt, and that greater focus should be placed on analyses of the income and cash flow statements. Camino Fiber believes that the 20% equity requirements should be sustained throughout the loan. AT&T agrees that the 20% equity requirement should be sustained throughout the term of the loan.
We agree that if an applicant is a subsidiary without any audited financial statements, the applicant may submit audited financial statements for its parent company. If the financial statements of the parent company are used in the financial viability review of the subsidiary, however, the parent company will be named in the loan agreement and identified as a financially responsible party for the subsidiary. We acknowledge Camino Fiber comment with regard to start-ups and the availability of CPA-audited financial statements for the last three years. If a newly-formed or start-up entity is applying and does not have CPA-audited or attested financial statements for the last three years, the applicant must provide CPA-audited or attested financial statements for as long as the applicant has been in business.
EBIT represent an applicant's ability to generate income on their operations which becomes important in determining the financial strength of the applicant and its ability to repay a CASF loan. We shall thus retain the requirement to report EBIT. The EBIT shows how much operating income (before interest and tax expenses) a company has in any given reporting period.
As a related measure of an applicant's ability to service its debt and to repay a CASF loan, we shall also evaluate its Times Interest Earned Ratio (TIER). The TIER is defined as: EBIT / Interest Expense. The TIER indicates how many times an applicant's earnings can cover its interest expense on a pre-tax basis. We shall require that the applicant to maintain a minimum 1.5 TIER through the life of the CASF loan.
We also impose a 20% equity requirement to help ensure that loans are made to financially viable companies that are capable of repaying the loaned amount in full.17 The applicant must demonstrate 20% equity requirement at the time of application and at loan closing. Many parties support retention of the 20% equity requirement. The applicant must sustain the 20% equity requirement throughout the life term of the loan; e.g. five years.
The 20% equity and 1.5 TIER requirements provide a high-level screening of an applicant's financial position and ability to manage the debt servicing of the loan. An applicant must meet the minimum TIER of 1.5 through the life term of the loan. As a general rule, when a company's time interest earned ratio is lower than 1.5, a lender should question its ability to meet interest expenses. If the ratio falls below 1, the company is not producing earnings to cover its interest expenses.
The statement of cash flows combined with all other financial information provided will be used to conduct a detailed financial evaluation of the applicant's financial ability to repay a loan.
The Commission may also ask for documentation of the applicant's outstanding loans, including all loan agreements and security agreements.
The applicant must list and identify all assets used as collateral to secure the loan. The applicant must also include a depreciation schedule that shows the economic life of each asset, equipment, and or facility that is being used as collateral for the loan only.
If the financial evaluation requires more information from the applicant that will assist in determining their financial viability, the CD and/or the partnering agency servicing and underwriting the loan will request such additional information (e.g., tax returns).
4.3. Qualifying for Multiple Loans
We adopt parties' recommendation to allow an applicant who has an outstanding CASF loan to apply for a new loan as long as all outstanding CASF loans are current and in good standing. Applicants may have the resources and ability to carry out several projects at the same time.
The financial eligibility requirements set forth in this decision, such as the required TIER of 1.5, will naturally take into account any outstanding loans and therefore mitigate the risk of lending to parties that cannot manage their debt.
4.4. Loan Duration
Setting a fixed repayment period on the loan requires an understanding of the average life of broadband technology and a consensus on how long we ideally want to finance a loan. We set a loan repayment period of five years as a cap for the loan term since it provides a long enough term for repayment while remaining within range of the economic life of the equipment being funded.
DRA requests clarification on how Commission staff developed the proposed five-year repayment period.
SEDCorp. comments that in keeping up with financial industry standard practice, they recommend tying the repayment period for any loan to the intended purpose for those funds. It is possible that some loan applications can result in amortization periods of less than five years, and provision for such shorter terms should be made. SEDCorp. also comments that specification of the loan duration begs clarification of the intended life of the loan program. Though the term over which the fund will be initially capitalized is specified in SB 1040, the intended life of the loan program is not specified. They recommend the drafting of additional language that addresses the long-term intent for the loan fund and its consequential management. Much greater detail is needed in the loan guidelines in order to manage the relationships with applicants and borrowers over the entire life of each loan and the continued life of the revolving loan fund.
The Small LECs support DRA and state that the Commission should supply additional details regarding the loan duration and funding availability limitations.
We set a maximum loan repayment term of five years since it provides a sufficiently long period for repayment while remaining within range of the economic life of the equipment being funded. Extending a repayment period to more than five years will deplete funds from the account due to a longer duration of repayment of those funds as well as a longer duration of accrued administrative costs to service the loan. A repayment period of more than five years will also constrain the available funds in the revolving account otherwise available for future lending; borrowers repaying the loan in a reasonable amount of time will allow for those funds to become available for lending to finance future projects.
In response to SEDCorp.'s inquiry on the duration of the loan program overall, we note that SB 1040 does not set a cutoff date for the CASF program. SB 1040 states that the collection period starts on January 1, 2011 and continues through 2015. SB 1040 states that "this bill would extend the operation of these provisions indefinitely." At this time, an awarded loan will have a loan duration term of five years. A borrower can repay without any pre-payment penalties if it decides to repay in full or at an accelerated rate during the loan term. The Loan Account is a revolving account and therefore monies in the account will become available for lending as outstanding loans principal and interest are paid. Appendix 2 sets forth the details of the loan account and guidelines to applicants.
4.5. Loan Amount Maximum
and Minimum
Based on historical data, the minimum CASF grant approved by the Commission has been $2,420 with a maximum grant approved for $19,294,717. The range is wide and based on how much money a project requests. The Loan Account is expected to collect a maximum of $3,000,000 per year over five years, totaling $15,000,000.
Taking these assumed set amounts into account, we shall require that no individual loan exceed 20% of the available funds in the CASF account. For example, if the loan account in year one has an available fund balance of $2.5 million, 20% of $2.5 million is $500,000. A single loan cannot be greater than $500,000. We do not adopt a minimum loan amount since our mission is to finance eligible broadband projects in California to expand broadband infrastructure to unserved and underserved areas.
DRA seeks clarification on how parties will know how much is left in the account in order to estimate whether their proposed project would be 20% or less of the entire revolving loan account, which is not to exceed $15 million over five years. Rather than expecting applicants to calculate 20% of the available funds, we direct CD staff to periodically review and monitor the CASF loan account balance and communicate what the maximum loan amount for a single loan will be.
The current cap will allow for multiple applicants to access funds from the loan account and avoid the situation of one loan encumbering all available funds in the account. If and when the loan account grows, CD staff will revisit the currently set maximum loan amount and recommend its resetting as appropriate. The Commission will approve any increase in the maximum loan amount via resolution and post the revised maximum loan amount on the CASF website.
4.6. Loan Security
Collateral, such as equipment assets will be required as security for the loan. The loan will be 100% secured. As part of the application, the applicant must include a collateral document that lists and identifies all assets that will secure the loan. The applicant must also submit a depreciation schedule that shows the economic life of each asset, equipment, and facility that are being used as collateral for the loan amount. The collateral identified as security for the CASF loan must not be used as collateral on any other outstanding or future loan. The Commission may require the borrower to execute a security agreement with the Commission.
The Small LECs comment that the Commission should not categorically forbid companies from offering assets that are used to secure other loans. This rule would likely prevent all of the Small LECs from participating in the loan aspect of the program, as most if not all of the Small LECs have already encumbered all of their assets with Commission approval as security for their RUS loans. Small LECs rely extensively on RUS loans for their debt needs, and the RUS requires that borrowers secure RUS loan with all of their telephone company assets. The value of the assets encumbered is not necessarily equal to the amounts borrowed from RUS, but the security is nevertheless a requirement of the RUS. The CASF rules should permit the partnering government financial agency to determine an appropriate security for CASF loan that takes into account all relevant outstanding loan obligations. The Commission shall permit second mortgages to be taken on assets used to secure RUS loans, as long as the total amount to be borrowed does not exceed the total value of the assets encumbered.
SEDCorp. in its reply comments support the Small LECs' observation that the assets of many of their members are already encumbered for RUS loans. It argues that there is a clear need to reevaluate the requirements for the collateralization of CASF loans.
As a general rule, the collateral identified as security for the CASF loan must not be used as collateral for any other outstanding or future loan. However, we acknowledge Small LECs' concern that they rely extensively on loans from the United States Department of Agriculture's RUS, and that RUS requires its borrowers to secure RUS loans with all of the borrower's telephone company assets. Therefore, we set forth this exception to the general rule above: we will allow CASF loan account applicants to use as collateral assets already used to secure a RUS loan or loans, as long as (1) the total amount borrowed/to be borrowed -- that is, the amount of the outstanding RUS loan(s) plus the amount of the potential CASF loan -- does not exceed the total value of the assets encumbered, and (2) the Commission is able to and does enter into an agreement with RUS where both RUS and the Commission have a first lien position on all identified collateral based on the amounts of each loan. We acknowledge the concern of the Small LECs that the U.S. Department of Agriculture's RUS may not accept a loan agreement where both RUS and the Commission have a first lien position on all identified collateral based on the amounts of each loan. Based on discussions with the Commission's CD, RUS has indicated that in the past, it has been able to accommodate other lenders and entered into a shared security arrangement. In the discussions with CD Staff, RUS expressed a willingness to enter into shared security arrangements where both RUS and CASF lenders have a first lien position on everything based on the pro-rated amounts of the outstanding loans. The depreciation schedule that shows the economic life of each asset, piece of equipment, and facility that is being used as collateral for the CASF loan amount must show (1) the value of each asset that is used to secure the RUS loan(s) and (2) the value used to secure the potential CASF loan. We remind applicants that, as a general rule, the CASF loan can be secured by the assets purchased with the CASF loan funds as well as all other assets that are not used as collateral for other loans.
4.7. Loan Closing
Once a loan is offered and approved via a Resolution, the borrower must sign a loan agreement that contains all the terms and conditions of the loan. If the required parties do not sign a loan agreement, the Commission will not execute the loan and will revoke the loan offer. The borrower cannot withdraw funds without a signed loan agreement in place.
The loan agreement document to be signed by the borrower must include all the loan terms set forth in the decision; such as the amount of the loan, the interest rate, the loan duration, security, fund disbursement, repayment, late payment, and default. Just like any loan documents, the borrower will have the chance to read and review the loan agreement document before signing it.
4.8. Loan Fund Repayment
The ACR proposed repayment terms as follows. The borrower will make all payments on the loan as detailed in the signed loan agreement. Repayment can begin as soon as funds are withdrawn by the borrower. Interest will begin accruing when the first withdrawal of funds is made. It is yet to be determined if repayments will be made on a monthly, quarterly, or annual basis over the term of the loan. Repayments will include interest plus principal on withdrawn funds, amortized over the term of the loan. If repayments are not received as specified in the loan agreement within five business days after the due date, a late payment charge will be added to the amounts due under the terms of the loan. A loan can be repaid in full at any time during the set loan term; no prepayment penalty will apply.
DRA recommends quarterly repayments. Monthly payments would create too much administrative expense, while annual repayment would be too risky, unless an escrow account process is set up for applicants to make incremental deposits and avoid falling short on their total annual payments.
SEDCorp. is unclear whether the proposed repayment process is intended to allow for deferment of payments during the construction period. Most, if not all, project proposals will be dependent on at least part of the revenues to be generated by the connections made as part of a new infrastructure expansion. SEDCorp. recommends clear wording be added to allow for this possibility. They further recommend specification of the "late payment charge" and the insertion of the words "in part or" before the words "in full" in the last sentence.
We shall require that loan repayments be made on a monthly basis. Since each loan will be unique in its date of disbursement, a quarterly payment would differ for every loan and add to the cost of administering each repayment. A monthly repayment allows for simpler administration of all loans in that we will know exactly when all loans are due and when late fees apply. Also, a monthly repayment will allow for funds to revolve at a faster pace and become available for re-lending to future applicants.
Repayment on a loan will not allow for deferment of payments (such as payment on principal) during the construction period of the funded project. Repayment on a loan will begin the next immediate month following the withdrawal of any funds. Repayment will include interest plus principal amortized over the term of the loan; i.e. five years. Any subsequent withdrawals will be added to the balance due of the loan and subsequently amortized over the remaining term of the loan. We further emphasize that a loan can be repaid in full or at an accelerated rate during the set loan terms and no prepayment penalty will apply.
With regard to comments on the late-payment charge, the decision adopts the concept of applying a late payment charge if a borrower is late on their monthly payment. The late payment charge amount will be part of the loan agreement document signed by the borrower.
4.9. Role of Loan Partnering Agency
The ACR draft proposal indicated the Commission would select a partnering government agency to assist in performing the financial eligibility review of applicants. The CD will conduct the technical project eligibility review of applicants but will require the partnering agency to perform the financial eligibility review and loan servicing piece. It is yet to be determined what the total cost to the applicant will be when filing a loan application. It is expected that a reasonable application fee will be charged to loan applicants. The fee could be a fixed amount or a small percentage of the loan amount that the applicant is seeking.
Camino Fiber comments that the role of the "partnering governmental agency" needs to be explained. The Small LECs inquire on which "partnering government financial agency" would be appropriate to review financial viability in connection with CASF loan applications. The Small LECs believe that choosing the right agency and developing clear guidelines to define the relationship with the Commission will be critical to the success of this aspect of the program.
SEDCorp. comments that use of the word "government" implies the intended use of a public entity and begs the method and criteria by which such an entity has or will be selected. SEDCorp. recommends full disclosure as to the proposed approach to administration of the loan program including services to be provided, qualifications of the service provider, and cost and that a procedure be established to select the service provider from the private sector per a standard, open competitive process. Recognizing that the Commission is in the utility business rather than the financing business, this means that the Commission should turn to the best source of information and assistance for design and execution of a financial program, the private financial sector. SEDCorp. further supports the Small LECs' and Camino Fiber Network's call for greater clarity about the intended identity, responsibilities and authority of the "partnering government agency."
SEDCorp. also comments that the brief treatment of the application fee is insufficient to gain a clear understanding of its purpose, use and amount. SEDCorp. strongly recommends that additional wording be added to clarify these points and what happens to the fee if an application is not approved.
The Commission does not have an in-house loan servicing and underwriting unit. Thus, the Commission must find another entity with the staff and tools already in place to perform such services. We first look to other public entities consistent with Section 2.04 of the State Contracting Manual, which states that we should identify the need of the service and evaluate the contract alternatives. If we can obtain the services from the public sector, we will work to partner with an existing public entity to assist in the underwriting and servicing of awarded loans. If we are unsuccessful in partnering with a public entity, we will explore additional options consistent with the State Contracting Manual, including the competitive bidding process.
Loan applicants will pay a reasonable application fee and/or other fees. The application fee could be a fixed amount or a small percentage of the loan amount the applicant is seeking. Fees associated with a loan application will be proposed and approved via a Commission resolution. If the Commission does not approve an application, the application fee for that loan will not be returned to the applicant.
17 Equity equals total assets minus total liabilities in the applicant's balance sheet.
