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78 | BROADBAND COMMUNITIES | www.broadbandcommunities.com | JULY 2016 FINANCE Why Aren't There More Fiber Overbuilders? Capital for any kind of infrastructure investment is scarce – and financing options are limited. By Doug Dawson / CCG Consulting T hese days, cities everywhere are hoping somebody will build fiber in their communities, and they are often surprised when they can't find anybody interested in building the fiber they seek. Many assume there are plenty of fiber overbuilders, but unfortunately, that isn't true. I think cities greatly overestimate the ability of private companies to fund and build fiber, and this raises the question: Why aren't there more fiber overbuilders? Hundreds of companies are building fiber, but most are relatively tiny. Independent telephone companies, small cable companies and electric cooperatives are building fiber in their local markets, but every small company has a natural debt borrowing ceiling that restricts its ability to raise money, similar to a limit on how much money a family can borrow. As these small companies borrow to build fiber, they can quickly max out their borrowing capacity. I have talked to dozens of small companies that have already built some fiber and would like to build more – but once they get to a certain level of debt on their balance sheets, lenders won't easily extend them more credit. Borrowing also requires cash equity. It is not unusual for a lender to demand that at least 20 percent of a project be funded by equity before it will lend. is is true even of government lenders – for example, the Rural Utilities Service requires that some portion of a project be equity funded. Even most grant programs assume some level of matching funds in the form of cash equity. Consider a fairly modest fiber project intended to pass 5,000 homes and businesses. As long as such a project isn't extremely rural, it is likely to require $10 to $12 million in total funding. at would cover the cost of construction plus a cushion to cover early operating losses until the project hits breakeven. Depending on the borrower's financial strength, such a project might require a minimum of 20 percent equity, meaning that a fiber builder would need to have $2 to $2.4 million in free cash to consider the project. Small companies rarely sit on that kind of cash. If they do have cash, once they use their cash reserves for a project or two, they run out of equity to finance additional projects. Another reason fiber business plans are hard to finance is that networks lose money for the first few years before they generate any cash. at is a real challenge because during the first few years, builders not only have to cover operational losses but also, with most forms of financing, have to begin making debt payments before generating enough cash to cover those payments. is then forces builders to borrow to cover debt payments – something that is hard to make work. I have seen numerous fiber business plans that were not fundable because there was no easy way for the borrower to make it through the first three or four years. Many of these