Rural Telecom Financing Yes, we are lending to RLECs! WTA Boot Camp II September 16, 2014

Transcription

1 Rural Telecom Financing Yes, we are lending to RLECs! WTA Boot Camp II September 16, 2014

2 Introduction Lennie Blakeslee Ø Lead Relationship Manager, Communications Division Colorado native and fellow rural American Sterling, CO Burlington, CO Elizabeth, CO Office: Cell: Confidential and Proprietary 2

3 About CoBank Ø CoBank is a $101 billion cooperative bank serving vital industries across rural America. The bank provides loans and other financial services to agribusinesses and rural power, water and communications providers. Ø Named The Safest Bank in the United States for 2014 by Global Finance magazine. Ø CoBank is a member of the Farm Credit System, a nationwide network of banks and retail lending associations chartered to support the borrowing needs of U.S. agriculture and the nation's rural economy. Ø Communications portfolio consists of outstanding loans totaling nearly $3 billion to approximately 200 customers in the RLEC, CATV, wireless, transport, tower and data center sectors. Confidential and Proprietary 3

4 The Lending Process Prior to Loan Ø Strategic planning process is critical Ø Have a clear strategic vision of why debt capital is necessary and how it will be deployed Ø Prepare 5-10 year projections including; balance sheet, income statement, statement of cash flows CoBank understands that the long term outlook will be based on the best information available today The long term projection will be updated annually or as the industry evolves and circumstances dictate 4

5 The Lending Process Loan Application Ø CoBank will need the following information, including but not limited to; The two most recent audits, including consolidating information for subsidiary companies A five-year projection model including; balance sheet, income statement, statement of cash flows A well-articulated description of the financing request and how debt capital will be utilized Ø Upon receipt and analysis CoBank may provide a Term Sheet Outlines terms and conditions under which CoBank would consider providing financing Utilized for discussion purposes to determine appropriate structure 5

6 The Lending Process Due Diligence and Credit Approval Ø Due Diligence More in-depth analysis of financial information and projections May require due diligence visit to customer site Completion of credit report outlining strengths and weaknesses Ø Credit Approval Multi-tiered process Credit analyst and relationship manager Communications Division Credit Manager Communications Senior Vice President Credit approvals group Ø Total Time for Approval: Typically 1-4 weeks after receipt of GOOD information! 6

7 The Lending Process After Approval Ø Documentation Internal or External counsel prepare loan documents depending upon size and complexity of transaction Company and/or borrower counsel review loan documents CoBank and Company agree on loan documents, which reflect Term Sheet provided earlier, and any agreed upon changes Both parties execute loan documents CoBank back office staff books and closes loan Funds available for use Ø Total time until funds available: Typically days after receipt of GOOD information! 7

8 The Lending Process Ongoing Requirements Ø Submit quarterly financial statements Internally prepared Ø Submit quarterly Compliance Certificates Based on quarterly financial statements Signifies current financial covenant levels and compliance/not Signed by officer, typically CEO or CFO Ø Submit annual Audit and Compliance Certificate 8

9 The Lending Process Benefits Ø Very competitive interest rates and terms Ø Thorough understanding of industry, market segments and challenges Ø Patronage As a cooperative bank, each year at the discretion of our board of directors, CoBank pays patronage equal to 1% of the average outstanding daily balance of your loan. Patronage is paid in March of the following year, 75% cash and 25% capital credits. CoBank patronage equates to a net effective interest rate DECREASE of.75% based on cash patronage, and approximately.82% based on total patronage. Ø Quick turn around Minimize opportunity cost and become more nimble in dynamic industry Ø Easy access to funds via CoBank customer service or CoLink online banking system 9

10 The Lending Process Common Financial Covenants Ø LEVERAGE RATIO Total Debt / EBITDA (or Operating Cash Flow) Guideline for appropriate debt level Must be a margin between debt and approximate value of the company as a multiple of EBITDA Ø DEBT SERVICE COVERAGE RATIO EBITDA (or OCF) / Annual Debt Service 1.5x is a reasonable DSC level Ø RATIO OF EQUITY / TOTAL ASSETS Measures skin in the game and ability to withstand adversity 35% minimum, 40-50% good, >50% excellent 10

11 Recent Projects Financed Recent Transactions Financed Ø RLEC Strategic acquisitions, expansion Ø Cable System acquisition and integration, refinancing of prior debt Ø Wireless Mobility Fund projects, strategic acquisitions Ø Fiber Transport Middle-Mile, Fiber to the tower Ø Data Center Acquisitions, expansion 11

12 Recent Projects Financed Acquisition Financing Ø Diversified ILEC Ø $200 million total financing $190 million 5-year term loan $ 10 million 5-year revolver Ø Refinance existing debt Ø Data Center acquisition 12

13 Recent Projects Financed Acquisition Financing Ø Diversified RLEC Ø $40,000,000 Ø Acquired RLEC, CLEC and Fiber Transport assets Ø 7-Year Amortizing Term Loan 50% bullet at maturity (equivalent to 14-year amortization) 13

14 Recent Projects Financed Acquisition Financing Ø Consortium of five RLECs Ø $38.75 million Ø Seven RLEC properties acquired Ø 6-year amortizing term loan Small bullet payment due at maturity 14

15 Recent Projects Financed Project Financing Ø RLEC owned non-regulated subsidiary Ø Middle mile fiber build Ø $10,000,000 Ø Multiple advance term loan Interest only availability period matching construction period Ø 7-year amortizing term loan Initial bullet payment post-construction AFTER initial IRU payments received Balance amortizes over remaining term 15

16 Recent Projects Financed Project Financing Ø Diversified RLEC Ø FTTH Ø $5,000,000 Ø 7-year revolving term loan One-year interest only period during primary construction period Principal reductions begin 5 th quarter after closing 16

17 The Lending Process Lender Considerations Ø Is there a strong, progressive management team, staff and board of directors in place to act as change agent toward a competitive business model? Ø Is there a continued reliance on shrinking legacy, regulated cash flows, or shift to competitive business model and diversification of revenues? Ø Is the balance sheet strong, providing the ability to take advantage of consolidation, non-regulated opportunities and withstand adversity? Ø Are there detailed planning and budgeting processes in place and demonstrated success meeting budget? Ø Does the company have the necessary project management skills for any planned expansion or acquisition integration? 17

18 The Lending Process Bottom Line Ø Debt capital is available to the rural telecommunications industry. Ø Solid management practices and a willingness to embrace a competitive business approach are critical. Ø Cultivate an open, frank, relationship and dialogue with your lender! Questions? 18

19 Finance Trends Thank you! Lennie Blakeslee Office: Cell: Confidential and Proprietary 19