As the Managing Director of the Municipal Capital Markets Group, Chris works with a wide range of investor clients on capital market securitizations, private placement and other funding sources. He funds profiles from high-rated to non-rated. His deep knowledge of the evolving financial regulatory landscape has also benefited from federal lending programs, including the U.S. Department of Agriculture’s Rural Utilities Service, and with non-profits. He holds a Bachelor’s Degree from the University of Colorado at Boulder.
Benjamin Kahn: And we're live.
Gary Bolton: Well, good morning everyone, and welcome to Where's The Funding? Hosted by the Fiber Broadband Association and sponsored by broadband.money. I'm Gary Bolton, the president and CEO of the Fiber Broadband Association, and this is our sixth episode of 2023. This is a 12-part series designed to help you understand and navigate and obtain matching funds for broadband grants. You know, the NTIB program requires a broadband applicant to come up to the table with a minimum of 25% matching funds and a letter of credit upfront with the application. For many small and non-traditional providers and communities, this may sound daunting, but it doesn't have to be. This 12-part series is designed to help you understand how and why meeting these requirements can be straightforward.
Gary: You know, last month we had a great session where we discussed navigating the BEAD letter of credit requirement with our guest, Phil Macres of Klein Law Group, Elizabeth Bowles of Aristotle and Pierce Verchick of Live Oak Bank. If you missed that, you can go to the FBernie website under events or go to broadband.money.io and watch the replay. Today on Where's The Funding? We're gonna focus on how to leverage the Capital Projects Fund from Treasury to match resources from private sources for BEAD grant applications. Pete Perlitz will explain how this allows organizations to maximizing their funding potential while ensuring that their projects are able to move forward in an efficient and timely manner. Chris Perlitz is the managing director of the Municipal Capital Markets Group. That's Municipal Capital Markets Group. Chris works with a wide range of investor clients on capital markets, security organizations, private placements and other financing sources. He funds profiles from highly rated to non-rated. His deep knowledge of evolving financial regulatory landscape has also benefited from the federal lending programs, including the US Department of Agriculture's RUS, Rural Utility Service and with nonprofits.
Gary: He holds a bachelor degree from the University of Colorado in Boulder, which is one of my favorite places on the planet. So, welcome Chris, and for audience, please type in your questions as we go and we'll work 'em into the discussion. So, Chris, one, thank you for joining us from Costa Rica. I am so jealous. You know, this, in Boulder, Costa Rica is my favorite place on the planet. So I know it's rough for you there but you know, so why don't we... Before we kind of get into the BEAD financing, let's start off with a little bit about you and the Municipal Capital Markets Group. So you're a Colorado outdoor guy, I guess you have a wife and two sons, how did you get involved with nonprofits and broadband funding? Kind of what makes you tick?
Chris Perlitz: I came from the tech industry and worked my first job outta college in Boulder, well, second job. First job was back country ski company. Second job was working for a tech company called Spectralink, which is... If anyone has got some seasonality in the wireless business, Spectralink had designed one of the first voiceover IP wireless solutions out there. We had provided services to everything from Goldman Sachs headquarters, Microsoft headquarters, Bill Gates's house, HP headquarters. Most of the Fortune 500 companies back then had heard of it or used it. But we had designed some jump band technology, so to speak, 8028 or 28 to provide wireless from microcells. And then I'd worked later in my career on one of the first IPTV networks for the chart under EcoStar, when they formed a broadband group to do basically.
Chris: And that's when we were starting to get some exposure to the fiber business. But back then we were... This was 20 years ago to date myself, but back then with content rights and over the top content was just sort of a dream. But I thought it was gonna happen in a short timeline, but we're still not quite there yet. People are still understanding what the notion of cutting the cord means. But it was around that time I decided to go work. I had an opportunity to go work with a developer up in the mountains up in Vale to develop fiber to the home. Actually, one was up in Truckee Donner, which was one of the first in California to go off and try to build their own utility. It was a utility to trying to build their own fiber network because the services for the projects that we were working on were not getting the sufficient bandwidth and quality of service they needed in that market.
Chris: So, and then I worked for the federal bankruptcy courts in Colorado. And it was about that point when I realized that I should probably go into finance. So ever since 2005 I've been in this space doing finance around this field/ I've always had the vision that I think eventually this become becomes a utility or regulated utility either through a co-op or through a municipal utility or through some sort of variation of a regulated ISP. So that's my view, just so you know my perspective. I do believe eventually we'll get there. It'll take probably a number of years as I thought IPDV would pick up. 20 years later, we're still, we're seeing it more and more affluent. But utility finance or utility broadband is gonna become more real probably in another 50 years. So it's gonna take a while.
Chris: But in any case, so our firm has been around since 1989. We were the only firm that I knew back about... It's been there since, for about 11, 12 years that was doing or had interest in the broadband. Back then it was, Oppenheimer was a big investor. They had worked on Utopia, they'd worked on Burlington, some of their early stage developments in this field 20 plus years ago.
Chris: And so it was nice. MCM, we've got a unique group, we're structured sort of like the way JP Morgan was structured back in the early 1900s. We don't have a lot of overhead like some of the other investment banks like a Piper or Jaffray or Stifel or whatever. We're a little bit cheaper as far as what we can do for our non-profit clients. But we all focus on different things. I do some policy work with USDA, real development programs and I have a lot of success working with that program. See few different levels. Couple of the colleagues focus on DD facilities, developmentally disabled buildings facilities, rural jails, pretty much anything that involves a P3 structure, we've been doing it for a long time. And so we have a lot of creativity involved in our process and a lot of seasonality with our group. We've got a trader who's in his 87 and we've got people that have 50, 60 years of experience in the field. So it's been really nice to be with our group. And you can look at our website at www.municapital.com and you can surf around. There's a little broadband link and things like that there. See what we do.
Gary: You know, it's funny, you're talking about how fast the pace of change. I remember back in the early 2000s, I was on a panel at the FTC with Dave Kettler, who was the CTO of BellSouth at the time. And he made this comment about the thundering hooves. You can hear the thundering hooves of the Aldabra tortoises.
Gary: So things take a little while, but yeah. So you talked about USDA, Monday, the USDA awarded $714 million from the RUS ReConnect program to build out these 33 build outs, 19 States, 90,000 locations. That's about two thirds of the $1.15 billion from ReConnect 4. That seems to be a lot. There's ReConnect, RDOF, we got all these programs out here. We just saw that GUMBO 2 has just got approved by the legislature in Louisiana. So, how should a community look at all the funding out there and figure out where to start?
Chris: Well, I think the first thing is to look at yourself as far as an organization, what is the demographic, socio-demographic market you are within, right? So all of the federal subsidies, let me just take a step back. I'm a big fan of grants when you can get them, but you can't rely on the grants for a project. You should always sort of have a strategy how to do this with minimizing the grant process 'cause grants as nice as they are, there's a lot of hooks and checks and balances and process with the grants. And sometimes in some of the current grants, they don't even know what they're gonna do on the backend to manage it, like the federal government. So if you can sidestep the grant process, great. But in those markets that are, they're rural, you're gonna have qualification requirements based on your population, based on your medium household income.
Chris: All of those will have an impact on what type of grants and how you go about getting those monies. And then the struggle after that is figuring on how you build up a project 'cause the grants aren't gonna cover the whole thing. They'll just cover a portion of it. Yeah, so I think the first thing is to figure out if you're an urban market and it's tier one city, there's different types of paths you would go than if you were, let's say rural. So if you know you're rural, then you know the USDA is probably a good, pretty good trajectory. Doesn't mean you can't pull in other grants, but the RUS has been a really good vehicle for this. Goes back to the mid-1900s, Rural Electrification Act and Telecom Act the USDA had started that helped build that program. And it's been the reason why we have telecom, at least in some of our rural markets. And so it's picking up the slack here for co-ops and for broadband and wireless.
Gary: Well, let's jump into Muni bonds. So, can you give us a little education on municipal bonds and how can a municipal bond help finance the match?
Chris: The match, so we focus on a tax... So the first thing is, just so you know, municipal bonds are qualified as tax-exempt bonds, which means the investors don't pay taxes on the investment, which means that generally our yields are gonna be lower than what you get in the general banking world. Banks don't have as much interest in tax-exempt investments. 85% of the investors in tax-exempts are high number of individuals. They really benefit, they're at that 40% tax bracket. So they get a benefit, real benefit for those investments. Up until about 2010, taxes and bonds were a lot lower than even the treasuries for highly rated investments, just like the US Treasury is. Up until about eight or nine months ago, it flipped back to normal. So for the last 10 years, everyone out there has been drunk with banking rates and low treasury rates and everything like that. So the world is getting back to normal. And typically tax-exempt investments are a good vehicle because you can do smaller pieces of it. You don't have to go out and issue corporate bonds at 100 million a click. You can go do smaller increments of 5 million, 10 million, 15 million a piece, and you can throttle your size based on what your demand is.
Chris: A lot of them are, what we're seeing in this space are revenue bonds. So we're leaning on just the revenues, the quality of the network or how it's getting built, the timing of it. There's a lot of mistakes over the last 25 years in this space of how people have gone through the process. Utopia went through, I think, three different versions of resetting their capital process. So that gives you an indication even the best in this field have had problems going through the process of raising capital. The revenue bonds are what we've been doing. And just really understanding the field that I have on the tech side has been helpful for us in working through the underwriting process and making sure that particular borrowers knew what their operation risks are, what their take rate risks are, what the competitive risks are, what the technological obsolescence risks are in the process. And that's, it's a full suite of analysis going through the process of raising money on revenue bonds. And there has been mistakes over the past. A lot of bankers out there will always say, "Well, let's issue as much as we can." There's...
Chris: There's a... There's some good examples out there where, let's say KentuckyWired or some other states that have issued a lot of debt, where why would you issue that much debt at once? Why don't you do it in stages? Right? So taxes and bonds will allow you to do that. So you don't have to do one big swath of raising the capital. You do it in pieces, you do it organically over time, decrease your interest liability, make you get on track so you know what you're doing before you start issuing more debt and carry more weight. So it's just a proper process that should happen. And it's in this field, like other fields, it's a struggle to get people to understand.
Gary: So when I did startups, we would do our series, our seed series and series A and B and so forth, so raising stages, but the investors would have so much capital under management that we knew that we'd be able to go back and get more. Is that... So is it... Is that the way you look at it is to say, okay, here's some milestones and we're going to do our first bond, and then we'll get these milestones and we'll do our next raise, and then do it in those kind of stages. Is that the best method?
Chris: Correct. Yeah. And the investors in this are big, large funds. There are individuals, but most of those individuals invest in those funds like a BlackRock, Goldman, Allspring are the big notable players in that, that basically hold taxes and bonds for their investors. And yeah, and a lot of times it'll go back to those same investors, right? You'll just keep going to the same guys over and over again. Once they understand the credit and they underwrite it and they feel comfortable with the analysis that's been done, then you just... It's like flipping a switch, right? Next year you do another one, next year you do another one. So we've been doing that with East Central Vermont Fiber over the years. We're gonna do another issue this year, later this year, and every time we do an issue, we do it incrementally when they need the... Probably when they're building up the project. Right? And that's been very efficient for them. And the investors are very comfortable knowing that they're not overextending themselves on how much they're issuing every year.
Gary: So can you give us... You mentioned one of the deals, but can you give us some highlights of Municipal bond deals that your team has structured?
Chris: Well, East Central Vermont, we've done everything. Well, our team in the broadband space, we did East Central Vermont, we've done sort of some advisory work with states. We did a project out in Oregon, one of our colleagues did. And yeah, just, yeah, those businesses are far in between, right? Because a lot of times you've got, a lot of consultants are coming and advising on structure. If it gets to be an investment grade, we're generally not gonna be in the mix. We can do investment grade and I too do investment grade investments, but a lot of times we're focusing on the non-rated tough credits, kinda helping them navigate that. But the process for which generally, when we go into those, and now when we go into those projects, they're just in the beginnings of their capital process, right?
Chris: They've maybe got some basic infrastructure in place. Most cities today have some rings or some fiber assets that are already existing. Leveraging that can be a big help. But yeah, working through the process and making sure all of the checks and balances on the financial model are there, is what we're focusing on these smaller issues. But it's... Yeah, it's hit or miss, just some people can get through there. Some people get through the notion of what they have to do and some can't. There's a political process, so you have to be thoughtful to that, right? How they're going through their procurement process can be different city by city, etcetera. We, as a company, we've done, in the last year even we were number... At least right now, I'd heard we were number two in the financial advisory for negotiated underwriting in the capital markets.
Chris: We've done, I think in the last four or five years, or six years, probably 15 to 20 billion in advisory work for utilities. So there's a hole that [0:17:37.3] ____ clients. A lot of those are state collaborations of utilities that are banding together to go buy a prepay of natural gas and things like that. So client wise, when we go back to '89, we've led the market in several different utility sides of the business. So I can give you references galore if you want 'em, but yeah, so there's a lot of creativity out there in our space, which is exciting.
Gary: So what's the max leverage or percent match that you have on a deal?
Chris: You generally see from... And it's, what drives it is the financial model, right? If you've got, what we see about 50% asset to loan value or equity if you will, to loan value is usually a good baseline for where the economics makes sense. And it doesn't have to be a big project, it could be relatively small. But generally in my experience, I think once you have about 50% of the... Now I'm talking the first phase. So if you're to do a small $10 million project, it's good to have... Generally speaking, if you've got about 5 million there in some form of collateral or asset, cash that helps you get there faster and makes the economics a little more viable. Remember, our whole goal here is to find a really low R pool for the client, right?
Chris: In the Muni space, it's a to race to the bottom. In other words, the bottom line is zero, right? In the ISP space, the race is to make as much profit as you can. So you're doing... There's different sort of viewpoints, ideologies on which direction you wanna go as far as who's gonna own the asset and who's gonna leverage. So, yeah, and those can be different. You can lever quite a bit with ISP. You can't lever as much with a Muni, right? Because they're generally more stable entities, but they often... They get the benefit of that in market, but they also wanna have some level of security that you can execute where we know an ISP can probably execute, right? A Muni doing it or utility doing it for the first time, not sure they can execute quite yet. So there's less leverage. Yeah.
Gary: So when you said assets, I mean obviously cash is king, but leveraging an asset, what do you guys... I mean, what works for you guys as far as assets?
Chris: It all depends on what capital you need to put in the project. So if you've got a ring for example, and you wanted to extend out that ring to provide services from the existing ring, then you already have an asset that you can use in the network. So you're not having to build, if you don't have a ring, then you have to figure your cost of building the ring is gonna be more expensive. So if you have a ring, all you gotta do is set up the operating costs of building that, extending out from that existing ring that you own and that can be relatively cheap, right? Then it's just an operating expense analysis and you've got a ring, so you can extend laterally from that ring and that will generate revenues to pay for the debt service. So we'll look at those numbers to make sure that you have enough projected revenues to pay for the future debt service of that, of the existing asset.
Gary: Yeah, that makes a lot of sense. What about, let's talk about timeline. So how long does it take from the initial plan to market with a non-rated municipal bond deal?
Chris: It's, I mean, we can turn one in 30 days. I've done them in 30 days. It just depends. It all boils down to the borrower, right? Who's trying to raise the money and can they get their ducks in a row? But typically speaking, I'd say probably 30-60 days from soup to nuts. You know, the process is you have to determine, and really in this business, one thing that I think that people forget is there's a lot of third, there's a lot of structure options out there to be creative and how you're issuing the debt. It doesn't have to be the municipality issue, the debt, it could be a third party, a sponsored entity, like 60, 20 corporation or a joint authority intergovernmental agreement across all the counties. You know, those entities can be the borrowers.
Chris: They don't have to have a huge balance sheet or any balance sheet at all. They just have to have an arms length connection to the city. The 60 through 20 is, the nice thing is, and we're working on one of those at the moment, you know, those assets roll back to the city at the end of the debt. So after this thing's paid off, the cities can take back the asset. So you form a separate entity that will do that work and 60 through 20 will work for co-ops and other things. But there's a lot of structural sort of fundamental questions that go into that, to the answer to your question, right? Does that make sense? So it's not just an easy Muni city issuing debt, if the city's... If a tier one city's issuing debt, their credit's great and they can get cheap capital and there you go. But the problem there is political undertones you have to deal with, competing against your incumbents in those markets, and generally that's a hard thing to do from a general obligation perspective, issuing taxes or something like that.
Gary: So can a ISP access a municipal bond market without the credit of a municipality?
Chris: They could, yeah. So there's industrial development bonds, private activity bonds. There's certain vehicles that we can use in the tax-exempt space that can allow you to access that cheap capital. There's various restrictions depending on state to state and restrictions depending on the use of those funds. Private activity, you can do, I think 10 million is the cap. And you can go up and so you can have each, let's say is a seed money, right? And then each county can, you can have, I think only four different private activity bonds per project, but you can have various districts that would issue individual. Does that make sense? So you can carve them up in different sections and then have up to four different private activity bonds working in conjunction for the same kinda network. And that's a legal question. Frankly, I'd rather, you know, read Council Red, but Red Book Council would be able to provide some more flavor to that. Happy to talk with the state Red Book authority on those notions of what they can do and can't do.
Gary: Well, since you brought up PABs, there's so many innovative ways that the public and private markets can participate utilizing, a lot of these poorly understood tools to get fiber projects done, indeed. Would be great to explore some various tools, that can you do a brief primer on the resurrection of private activity bonds and what that'll mean? A unique, you know, P3 funding models, different solutions that you guys can...
Chris: Yeah. The federal government actually relaxed the rules on private activity bonds to incorporate broadband. And that was something that occurred a couple years ago that's allowed us to venture into that field more aggressively with the broadband side, which is great because I think it brings more of a P3 relationship to the need here. You know, PABs, again are limited, but they could be a good source for seeding a project, right? Once you get that 10 million, you can go, again when we underwrite these, we have to look at what is the feasibility of it? What does the proforma look like? We'd have to understand who the operator is. If it's an ISP, we wanna really understand that ISP. You know, and like you said in the very beginning, you could do different series, right? So you could have a series A as a private activity bond.
Chris: Over here you can have a BE, which might be a taxable tail or something like that. Or you could do different creative structures. There's even some sub debt, some equity subordinated debt equity options that we've used in the past which could help bridge the gap for that capital gain. But because the capital's so cheap on the tax-exempt side, it's easier to go. It's worth going down that path. Plus you're also going through that process, you also get some municipal exposure and then you really get your political support or not get your support. So it'll help guide you where you sit within the community. And it's always good when we're doing these to understand what kinda political will there is. Is a Muni behind you? They're gonna support you, help you get there. So that's a key point of going through the process. It seems like a pain in the butt, but it's really worth it in the long haul 'cause those might be your clients, right? If you're building a network and you're separate and you're the city, it's one thing. But if you're a separate entity, you wanna have that Muni be involved in your process because they are ultimately could become your anchors.
Gary: Yeah, I didn't even think about that. So you really, when you are building your capital stack and you're raising bonds and so forth, your series I guess, you don't have to use the same instrument each series. You can look at the maturity and where you are on the project and what the market environment is at time at of the raise. And it seems like a lot of different factors to see what the strategy is and what the debt instrument or what type of debt instrument and...
Chris: Yeah. And it's also nice to note when you do capital markets work, you can bring in banks. A lot of times we'll bring a local bank in to buy a... We're working on one up in Wyoming and we are gonna bring, hopefully bring a local bank to buy a small tranche, let's say 100,000 if they are interested. Like I said, not a lot of banks are lending right now, but we can carve a little bit of piece here and there to satisfy the local investment, I think it's important to have them involved. So that's, and that brings more politic will, and that drives more momentum within the project etcetera. So that's a big part of the process we like to bring into the mix here.
Gary: So earlier you mentioned a municipal advisor. What's the difference between a municipal advisor and an underwriter?
Chris: So, Dodd-Frank had created a rule that you can't provide advisory work. And then you can't be advising a city and not notify them your fiduciary responsibility and then also underwrite it.
Chris: So in other words, there is a few projects that would default back in 2009 and 2010, where there was somebody advising a city to go do something, let's say build a sewer system. And they were advising the city do it, and then they turned around and they underwrote it. So, hey, this is the structure you should use. Oh, by the way, I'm buying it, right? There's a conflict of interest there. And so part of the rule was of separating the two is that you have to define yourself as an underwriter. You have to define yourself as a financial advisor or municipal advisor. I think that's a fair differentiation. Now, if you are engaged as an underwriter, you can't provide advice within limits, but as a municipal advisor, your fiduciary responsibility is to the borrower. If you're an underwriter, your fiduciary responsibility is to your investor. So you have to define that role up front. We do both. We can work as a municipal advisor or an underwriter except to define that role upfront. And there is various documentation involved. Frankly, that's one of the things I think that lacks in this field.
Chris: There needs to be more sort of advisory work to help this that understands broadband, right? Advising people to go do a general obligation bond is really not gonna satisfy the problem. It's someone who knows broadband that can go in and dig through the financial model and do this optically best for the client instead of just, hey, go out and do a tax issue and because anyone can do that, anyone can underwrite that, right? You're using the taxes. So you really understand the field is important to be able to do it properly.
Gary: Hey, so I had Joey Wender on for breakfast several weeks ago now. And he had said that they had already issued about half of their $10 billion of Capital Projects Fund. So where are we in the window? Is it too late to try to go after Capital Projects Fund or where are we in and should people look at ARPA or what money is available that they should be looking at?
Chris: And what again, who is the... I'm sorry.
Gary: For a BEAD match.
Chris: Oh, for a BEAD match. So one thing we've been doing for BEAD, at least we are contemplating with these folks is that we could bridge the BEAD funding with grant anticipation. And even, like I said before, one of our main goals is to bring the local lenders, the banks involved. Because right now, they are not lending, right? And so to ask a bank, I'm sure Live Oak is great. They are doing a lot of work. There's a lot of banks out there that can't lend, but there's a lot of them that can. The lion share are not doing this type of thing because it's too risky for them, right? They don't understand broadband, they don't understand the economics. They are not gonna extend themselves from credit perspective. Especially the regulators aren't gonna like it. CRAs aren't gonna drive the underwriting, right?
Chris: CRAs are a nice to have regulated perspective, but they are not driving the banks ability to underwrite. It's important 'cause a lot of people misconceive that. But nonetheless, what we've been doing is bringing a local bank involved. Let's say for example, you have a bid, a borrower. We can do a grant anticipation note and put the funds sitting in a trust account. Then the bank can look back and say, okay, well we are gonna use that funds in the trustee account is collateral to provide the letter of credit to support the project. Does that make sense? So we would fund it into a trustee. We won't release the funds of the trustee under certain conditions until the project's ready to go, until, you know, etcetera etcetera. One thing to note that's happening more recently that wasn't available six or eight months ago, is we're seeing big arbitrage spreads.
Chris: Arbitrage is a difference between how much rate you are paying on your loan versus how much... 'Cause we advance fund, 'cause we are setting the rate when we close, how much money you had, you are paying interest on your loan versus how much reinvestment you are getting off of the loan. So when you set, put the money on a trustee, you are gonna earn, let's say one month treasury at 5% and your loan is, let's say for a one year band is at 5%. Well, your rate is practically zero minus cost of issuance, right? So the arbitrage could have a big impact on these economics.
Chris: And that didn't exist until, like I said, six or eight months ago. It was happening before 2009. We were always, we were doing, looking at arbitrage rebates and things like that. But now we are back to that and that's great. 'Cause that means our loans are gonna be more effective than they were for the last 10 years. Again, the last 10 years is a different oddity in the market as everyone else. And so we're gonna get back to normal.
Gary: Yeah, I don't think we'll get to see those days anymore, but the...
Chris: No, no, people don't wanna...
Gary: Interest rates were nice. But, all right. Well listen, enjoy your time, Chris, in Costa Rica. Such an amazing place. I really appreciate you taking time out of your family vacation to talk to our audience today. And just you have a wealth of knowledge.
Gary: So I look maybe I'll catch up with you in Tahoe in a few end of the month or end of July to ace this thing. But you guys enjoy and for our guests, please dial back in next month and for our next episode of Where's the Funding? So thanks everyone for joining us and we'll see you next time.
Chris: Thanks Gary.