The Financing

Who will pay to set up a network?

The Towns will be asked to sign an Inter-Local Contract that sets up a governance system for the project.  The ILC will in turn contract with Valley Fiber to design, build and operate the project.  Once the project is self-sustaining, the ILC may decide to take over those functions in its own right.

Financing, in the form of non-recourse capital leases, will be secured from private lenders. It will be secured by the telecom network itself, much like a residential mortgage. Towns will not have to lay out money, and participation in the project will not affect your town’s ability to borrow or bond.

Who will the financiers be?

We don’t yet know. We plan to have a competitive bidding process to select the financier. This is what Burlington Telecom did. Their initial financing was won by Koch Financial. Just recently, however, they refinanced with CitiMortgage to get a more attractive interest rate.

Who pays for this? Why should our town float a bond for this project? Aren't taxes are too high already?

The fiber network would not be financed by municipal bond. The interest and amortization of the capital lease is paid by the network's subscribers. Taxes would not increase; in fact, the value of the network would mean that property taxes would be paid TO participating towns.

How will this affect town's bond rating?

In the event that lease payments are not paid, the lease expires. In this case, the Lessor will most likely come to the Town(s) to seek a “workout”. If they are unsuccessful, the lessor can repossess the network and, by selling or operating it, attempt to get their money back. Should they fail to get it all back in this manner, they can come back to the Town(s) to request that they make up the difference. The Towns have NO legal obligation to do so. However, should they decline to pay anything, their bond rating could be affected. In practice, it is rare for Towns in such a situation to either pay the entirety or to pay nothing. Usually there is an accommodation in which both sides “share some pain”. It is important to note, however, that in the negotiation over how to “share the pain” the Towns have the significant bargaining power associated with having no legal obligation to pay anything at all.

What are the risks to our town?

There are limited risks to the participating towns. The towns will not be “joint and severally liable for the capital lease. Towns are morally liable only for their portion of the lease (allocated by households).

Although the capital lease is not backed by the “full faith and credit” of the town, in the unlikely event of a default, a failure to cure that portion of the outstanding balance after allowing for the value of the network itself, might impair the participating towns’ credit ratings, IF the town(s) decided not to pay any portion of the missiong amounts of the lease. (see the previous question) The preliminary financial models developed by ValleyFiber have been conservatively calculated to minimize this possibility. Participating towns may also seek credit enhancement from the Vermont Telecom Authority, to further protect a town’s credit rating.

Are there financial benefits to the town?

Although the fiber network will be owned by the participating towns, it will make a Payment in Lieu of Taxes (PILOT) to level the playing field with commercial providers. As such, towns will immediately experience a new revenue stream from this initiative. Moreover, once the capital lease is paid down , the Entity can begin distributing excess revenues to participating towns on a per-subscriber basis or use that money for network improvements, as technology changes. Over time, these could be a significant percent of the average town’s budget and could therefore potentially provide a welcome form of local property tax relief.

Has the new state law’s provision stating that a capital lease is not considered a debt of the town been tested in court?

No. However, towns have frequently used capital lease financing for major projects such as parking garages or fire trucks. This is a well-established form of municipal finance, particularly for projects that have their own revenue stream

The municipal bond market is in severe turmoil due to the possible downgrading of the credit ratings of several major bond insurers. What makes ECFiber think it can raise municipal capital lease financing?

The municipal capital lease market is a separate niche market from the municipal bond market. Unlike municipal general obligation bonds which are backed by the "full faith and credit" of the issuer (i.e., the town), a municipal capital lease is based exclusively on project revenues. Further, municipal capital leases are not, and never have been, insured, so the problems with municipal bond insurers does not change the attractiveness of capital leases. Indeed, it arguably enhances them relative to straight municipal bonds since leases have not changed and bonds have (for the worse).

We have been in touch with a number of potential bidders to "warm them up." None has said that this cannot be done at all--though at what price is another matter. The main negative that we have heard is the size--which is large for the Lease market. There are probably only 6 or 8 players that could swallow it at one bite. That means, in order to reach a broader market, we will be encouraging bidding consortiums.

In short, we have received no indications that this cannot be done--but several that it will take more work and time to do than it would have 12 - 18 months ago.