# Presentation: 487153

## Broadband Access Loan and Loan Guarantee Program – How to Apply

***Rural Development***
***1400 Independence Ave. SW***
***Washington, DC 20250***
***www.usda.gov/rus/***

***Presenter:***
***Dimitri Kombolias***

**Broadband Access Loan and ****Loan Guarantee Program – How to Apply**

**Notes:**
Good afternoon.

With this afternoon’s session, we’re going to walk through the processes of  completing and submitting a broadband loan application.

## Eligible Rural Community

_*Eligible rural community*_* *means any incorporated or unincorporated place in the United States, its territories and insular possessions (including any area within the Federated States of Micronesia, the Republic of the Marshall Islands, and the Republic of Palau) that has no more than 20,000 inhabitants, based on the most recent available population statistics from the Bureau of the Census – http://www.census.gov.

**Notes:**
The 2000 Census is used as the source to determine if a community is eligible.

## Service Requirement

- Must enable a subscriber to transmit and receive at a rate of no less than 200 kilobits per second; and
- Must provide data transmission service and may provide voice, graphics, and video.

**Notes:**
The minimum bandwidth requirements are the ability to transmit data both upstream and downstream at a rate of 200 kilobits per second.

## Eligible Applicant 

- A legally organized entity providing or proposing to provide service to an eligible rural community that has sufficient authority to enter into a contract with Rural Development and can carry out
- the purposes of the loan.

## Eligible Purposes

- New construction and improvements to existing facilities
- Broadband facilities leased under the terms of a capital lease (limited to 5 years and option of ownership)
- Acquisition of assets (less than 50% of the requested loan amount)
- Refinancing existing Telecommunications Program debt (up to 40% of requested loan amount)

**Notes:**
It should be noted that under the Broadband Program, existing loans from outside lenders cannot be refinanced.

It is possible for RUS to share a lien with another lender.

## Ineligible Purposes

- Acquire stock, facilities, or equipment of an affiliate of the applicant
- Finance customer terminal equipment (including modems) or inside wiring not owned by the applicant
- Vehicles that are not used primarily in construction

**Notes:**
Generally RUS will not finance transactions with affiliated organizations.  However, on a case by case basis, it is possible that RUS will consider certain requests if they can be fully supported and if it can be demonstrated that the transactions will be arms length transactions.

As indicated in the previous slide, we will finance acquisition of assets, however, we will not finance the purchase of stock

## Ineligible Purposes, cont.

- Broadband facilities leased under an operating lease (i.e., tower leases, building leases, land leases, etc.)
- Mergers or consolidations
- Operating expenses (i.e., salaries, marketing, legal, etc.)

**Notes:**
RUS cannot fund any operating expenses.  

## Types of Loans

**Direct Cost-of-Money Loans **
**$998,000,000**** Available this Fiscal Year**

**Notes:**
The program was established to include a Direct 4% Loan option as well as Loan Guarantees; however, funding is not available for these programs this fiscal year.

## Loan Terms

- Funds are advanced as needed
- Interest is payable monthly on funds advanced
- Principal payments are deferred for 1 year from the date of the first advance

**Loan Terms**

**Notes:**
Funds are drawn down as needed and the interest rate is set at that time.

On day one for a 15 year amortization period, the interest is based on the treasury rate for a 15 year maturity.  For an advance in year three, the interest rate is based on the treasury rate for a 12 year maturity period.

All broadband loans automatically receive a one year principal deferment.  This is to allow cashflow for the operation to get going.

## The minimum amount of a loan that RDUP will consider is $100,000

The required minimum TIER is 1.25 at the end of the 5th year of the feasibility study

- The minimum amount of a loan that RDUP will consider is $100,000
- The required minimum TIER is 1.25 at the end of the 5th year of the feasibility study

**Notes:**
If the financial forecast does not indicate that a TIER of 1.25 can be achieved at the end of the 5th year, then the application cannot be deemed feasible and a loan cannot be made.

## Loan Terms

**Loan Terms**

- TIER* *means **T**imes **I**nterest **E**arned **R**atio.
- TIER is the ratio of an applicant’s net income (after taxes) plus interest expense, all divided by interest expense. For the purpose of this calculation, all amounts will be annual figures and interest expense will include only interest on debt with a maturity greater than one year.

## Rural Development generally requires a first lien on the borrower’s assets

Will share the first lien position (pari passu) with another lender on a pro rata basis
Will develop security arrangements if bond financing is involved in the project

**Loan Terms**

- Rural Development generally requires a first lien on the borrower’s assets
- Will share the first lien position (pari passu) with another lender on a pro rata basis
- Will develop security arrangements if bond financing is involved in the project

**Notes:**
RUS has developed a form of Intercreditor Agreement which can be used when sharing security interests with other lenders.

## Credit Support
		Business Plan
			Market Survey
				Financial Information
						System Design

**Key Components of an Application**

- Credit Support
- 		Business Plan
- 			Market Survey
- 				Financial Information
- 						System Design

**Notes:**
The application is broken down into the five areas listed.  The next few slides will go into each one of theses areas.

## Credit Support

_***THE NUMBER ONE REASON APPLICATIONS ARE RETURNED!***_* *

**Notes:**
As indicated earlier, this is the main reason that most applications are returned.

## 7 CFR 1738.20

- Minimum of 20 % of the requested loan amount
- Cash for one full year operating expense
- Net plant, cash, letter of credit

**Notes:**
The credit support requirement is the greater of 20% of the requested loan amount or cash to cover one years worth of operating expenses.

This requirement can be met with net plant, cash or a letter of credit depending on the specific requirement for the application in question.

## How much do I need?

- If the loan application is for $1,000,000:

| minimum creditsupport |  |  |  |  |
| --- | --- | --- | --- | --- |
|  | = | $1,000,000 * 20% | = | $200,000 |
|  |  |  |  |  |

**Notes:**
In this example the minimum credit support requirement is $200,000

## Cash Requirement

- Defined as sufficient cash to cover one full year of operating expenses; and
- For telecommunication companies with positive cash flow for the two previous years, this requirement can be waived

**Notes:**
If there is a cash requirement, the cash must be available at the time of loan closing.

The cash cannot be infused into the company over the life of the loan or on a pro-rata basis as loan funds are drawn down.

## What is a full year of expenses?

-    The operating expenses, as shown for the second year of the five year loan period, as detailed in the pro-forma financial statement included as part of the application.

**Notes:**
Schedule N-3b, the Financial Forecast section of the application, is the reference for making this determination.

For determining the operating cash requirement, interest expense and costs of goods sold are included in this calculation.

## What is acceptable for Credit Support?

- Cash
- Net plant less any outstanding debt/liens
- Licenses (purchase price less any amortization/depreciation or outstanding liens)
- Irrevocable letter of credit (LOC)

**Notes:**
It should be noted that the letter of credit cannot be used to satisfy the cash requirement (unless at time of loan closing, the letter of credit is converted to cash).  It can only be used on the asset side of the credit support requirement.

## What is not acceptable as Credit Support?

**Accounts receivable**
**LOC for cash requirement**
**Parent’s assets**

**Equity infusions over the life of the loan**
**Loans**
**Value of company if sold**
**Value of customers**

**Notes:**
Although there is value to accounts receivable, we are currently not allowing this category to be used in support of the credit support requirement.
Intangibles such as value of the company if sold and value of a customer also cannot be used for credit support.

## Letter of Credit:  Bank Terms

- Investor to enter into LOC to benefit Broadband Borrower and the Government
- LOC secured and serviced by the investor
- LOC to be irrevocable permitting unconditional draws by the Broadband Borrower and the Government
- LOC to be in effect for 5 years

**Notes:**
A letter of credit must be secured by assets outside of the entity applying for the loan.

## Letter of Credit:  Borrower Terms(Included as conditions in the loan agreement)

- LOC must be in effect for the shorter of      5 years or until the Borrower achieves an equity level of 20%
- Borrower agrees to draw on the LOC if the quarterly financials show a negative cash flow.

**Notes:**
In addition to the actual letter of credit that is issued by the bank, RUS will include these covenants in the loan documents to ensure that the letter of credit remains in force for the required period of time.

## Borrower Terms:  Continued

- Borrower agrees to draw on the LOC when directed by Rural Development
- Failure to maintain the LOC will be an Event of Default

## Credit Support Examples

| Type of Entity | Start-up |
| --- | --- |
| Loan Amount | $2,000,000 |
| Full Year Ops. Expense | $300,000 |
|  |  |
| Minimum Credit Support | $400,000 (20% of $2M) |

- Of this $400,000 amount, **$300,000** _must_ be cash to fulfill the operating expense cash requirement.
- The remaining **$100,000** can be met with cash or other acceptable options previously listed.

**Notes:**
In this example, the applicant is a start-up operation and has a cash requirement for operating expenses.

The operating expenses are less than the overall credit support requirement.

Therefore, $300,000 of the requirement must be cash, and the remainder can be in the form of assets or letter of credit.

## Credit Support Examples

- If Operating Expense amount is _greater_ than 20% of the requested loan, then the Operating Expense figure becomes the credit support amount._All_ **$500,000** must be in the form of cash.

| Type of Entity | Start-up |
| --- | --- |
| Loan Amount | $2,000,000 |
| Full Year Ops. Expense | $500,000 |
|  |  |
| Minimum Credit Support | $500,000 |

**Notes:**
Again, in this example there is a cash requirement for operating expenses.  

The operating expenses exceed the minimum 20% requirement and the total credit support requirement is now $500,000.  It must all be in the form of cash!

## Credit Support Examples

| Type of Entity | Existing Telecom**with two prior years’ positive cash flow |
| --- | --- |
| Loan Amount | $2,000,000 |
| Full Year Ops. Expense | $500,000 |
|  |  |
| Minimum Credit Support | $400,000 |

- In this case, the cash requirement is waived for the applicant.  However, minimum Credit Support of _**$400,000**_ (20% of $2M) still applies, and can be met with cash or other acceptable options previously listed.

**Notes:**
In this case, there is no cash requirement and even though operating expenses exceed 20% of the loan amount, the credit support requirement is limited to 20% of the requested loan amount or $400,000.

## Evidence of Credit Support

**Audited financial statements**
**Bank statements**
**Escrow accounts**

**Investment agreements**
**Letter of credit**
**Appraisals of assets performed by qualified firms**

**Notes:**
When an application is submitted, adequate evidence must be included in the application that demonstrates the ability to satisfy the credit support requirements.

Include commitments from any investors, as well as evidence indicating their wherewithal to provide the investment.

## Satisfying Credit Support

- Evidence that the credit support requirement can be satisfied must be included in the application
- The credit support requirement must be satisfied before loan funds are released.

**Notes:**
This requirement has now been incorporated into the legal documents and does not need to be satisfied until loan closing.

## Satisfying Credit Support

- Any cash requirement will have to be available in the applicant’s accounts at loan closing
- These funds can be used for operating expenses after closing.  They do not have to be maintained in a reserve.

**Notes:**
Funds to cover the cash requirement do not have to be maintained in a reserve.  They are intended to be used for operating expenses once the loan is closed.

## Additional Support Requirements

- 	If the financial analysis of the application indicates that an applicant will experience a negative cash flow at any time during the forecast period, Rural Development will require that  arrangements be put in place to make additional infusions of equity.

**Notes:**
There can be additional equity requirements if the financial analysis reveals that operations will not be able to cover all expenses in the early years of the operation.

The additional requirements can be in the form of additional cash immediately being infused into the operation, setting up escrow accounts to cover projected shortfalls or binding agreements by the stockholders or LLC members that additional cash will be made available when necessary.

## General Overview
How will loan funds be used?
Are non-loan funds required?
Details on working capital
Investments required
Management

**Business Plan**

- General Overview
- How will loan funds be used?
- Are non-loan funds required?
- Details on working capital
- Investments required
- Management

**Notes:**
The business plan needs to layout the proposed operation.  How will loan funds be used, are any non-loan funds required, the experience of the management team.

## Business Plan

**Business Plan**

- Business Purposes
- Goods and Services
- Existing services, if applicable
- Proposed goods and services
- State of development
- Status of licenses and regulatory approvals

**Notes:**
What are the proposed services and rates.

Are there any licenses (state, federal or local) that are required to run the proposed operation.

## Business Plan

**Business Plan**

- Main competitors in Target Market
- Market Analysis
- Description of primary market
- Influences to industry
- Target customers
- Product Pricing
- Advertising/Promotion
- Financial Information

**Notes:**
An important part of the business plan is identifying the competitors in the area.  This will allow you to see what existing services are available, the prices for these services and will help in the development of your market survey.

The market analysis should clearly identify the different market segments that are being targeted, what is going on in the industry that could effect the proposed services now and in the future and what is the advertising plan for attracting customers.

One of the most important parts of the business plan is the financial model.  For existing operations the model should start with a least 2 years of financial history.  For all applications, the financial model must project revenues and expenses for a five year period and must include detailed assumptions.

## MARKET SURVEY

## Market Survey

**Market Survey**

- Critical to determine the interest and demands of the targeted communities for the proposed service offerings

**Notes:**
An incomplete or inadequate market survey is another of the main reasons applications are returned.
Some do a survey just to fulfill our requirement instead of using it as a business development tool.

One of the keys to developing a good business plan is conducting in-depth market research to determine the interest and demands of the targeted community prior to committing financial resources.  

## Provides:
Knowledge of market potential
Understanding of competition
Knowledge of demands/needs of potential customer base
Supports:
Feasibility studies
Strategic planning goals

**Market Research**

- Provides:
- Knowledge of market potential
- Understanding of competition
- Knowledge of demands/needs of potential customer base
- Supports:
- Feasibility studies
- Strategic planning goals

**Notes:**
We are no longer in a monopolistic regulated telecommunications arena.  Some communities have existing providers, or incumbent providers of voice and video that could upgrade their systems to offer broadband.  It is important to understand who your potential competitors are, what services they are offering at what prices.

Thorough market research will provide knowledge of the proposed market’s potential, an understanding of existing and potential competition, and a knowledge of the needs and demands of the potential customer base.

The results of the market research will be used to support feasibility studies of the proposed project.  

## Market Survey Methods
Direct Mailings
Telephone Surveys
Door-to-Door
Town Meetings
Pre-subscriptions/signed contracts

**Market Survey***** ***

- Market Survey Methods
- Direct Mailings
- Telephone Surveys
- Door-to-Door
- Town Meetings
- Pre-subscriptions/signed contracts

**Notes:**
What are some of the acceptable methods of surveys?

Direct mailings – these are generally done by an existing provider that is upgrading service.  The survey can be included in with their bill.
Telephone surveys – Some of the larger applications which cover multiple communities; generally done by a marketing firm – those can be done in-house.
Door-to-door – For smaller, individual community applications
Town meetings can be in conjunction with pre-subscriptions and signed contracts.  Also used in smaller applications.

## Do not use the Internet as a survey tool
Not an indication of the desires of the whole population
Only surveying those who have computers and Internet service; and 
Only those who subscribe to your Internet service
Cannot extrapolate results to the community as a whole	

**Market Research**

- Do _**not**_ use the Internet as a survey tool
- Not an indication of the desires of the whole population
- Only surveying those who have computers and Internet service; _**and**_
- Only those who subscribe to your Internet service
- Cannot extrapolate results to the community as a whole

**Notes:**
Using the Internet as a means of delivering the survey questionnaire biases the results of the survey to those with a computer and Internet service, possibly already subscribing to your service.

The results of the survey cannot be extrapolated to the total households of the community.

## Computer ownership
Current Internet usage – dial-up, Broadband, time online, and rate
Satisfaction with current provider – quality of service, value, and likes/dislikes
Willingness to switch to Broadband or change providers
Service offerings/rates (including any installation or upfront charges for equipment)

**Market Survey - Design**

- Computer ownership
- Current Internet usage – dial-up, Broadband, time online, and rate
- Satisfaction with current provider – quality of service, value, and likes/dislikes
- Willingness to switch to Broadband or change providers
- Service offerings/rates (including any installation or upfront charges for equipment)

**Notes:**
Potential applicants regularly request a sample of an acceptable market survey.  We do not have a sample survey but do offer guidance in the application guide as to the types of information which should be collected.  
These include: computer ownership, current usage, satisfaction with existing provider – quality of the service, likes/dislikes, willingness to upgrade to broadband or to switch from their existing providers.  
Include applicant’s proposed service offerings and rates and mention any upfront charges for equipment or installation.

## Other service offerings with rates
Voice
Video
Triple Play
Demographic Information

**Market Survey - Design**

- Other service offerings with rates
- Voice
- Video
- Triple Play
- Demographic Information

**Notes:**
Mention all service offerings and any discounts for multiple services.

Also collect age, income, household size – as they are essential for cross tabulating results and getting community specific results.

## Market Survey – Design 

**Market Survey – Design***** ***

- Do _not_ list a range of prices when doing a market survey because people will usually pick the lowest prices

**Notes:**
An important point:  Do not list a range of prices for your services.  Some have listed various price ranges when asking what price a respondent would be willing to pay for  the service.  Generally respondents will check the lowest price which may not be the price that you can offer the service and maintain a feasible project.

## The Magic Number – How many responses/surveys are sufficient?
There is no magic number
Statistically significant – depends on the size of the population

**Market Survey**

- The Magic Number – How many responses/surveys are sufficient?
- There is no magic number
- Statistically significant – depends on the size of the population

**Notes:**
Another frequently asked question is “how many survey responses will RUS accept for a complete market survey”

There isn’t a magic number – It depends on the size of the population to which the results will be applied. 

Each community proposed to be served should be surveyed.

## Market Survey

**Market Survey**

- The sample must be representative of the population of the community

**Notes:**
In the end, the sample must be representative of the population of each community proposed in the application.

## Market Survey

- If “green field” areas are proposed, include information that justifies the subscriber penetration rates since no market information is available
- Developers build-out plans
- Lots proposed to be constructed
- Lots already sold

**Notes:**
But what to do about green field areas?  There are no potential subscribers to interview...

Justify your results with developer build out plans (number of new subscribers/year), lots proposed to be constructed and those already sold. 
Potential demographics of the future households based on comparisons with existing similar communities.

Will you be the incumbent provider of the services?

## Based on households/businesses – not population (generally one connection per household)

Recognize the differences between communities – income, age, and competition

**Market Survey – Results**

- Based on households/businesses – not population (generally one connection per household)
- Recognize the differences between communities – income, age, and competition

**Notes:**
Results of the survey should be based on households – not the population of the community since we assume only one broadband connection per house.

If serving multiple communities, recognize any differences between communities such as income, age, existing competition, when compiling results for potential subscribers.

## Do not base results on:

National Statistics
	“No direct mailer or door-to-door surveys were completed since past history for broadband service clearly demonstrates the need.  See OPASTCO web page ... for details of rural survey for broadband subscription rates...” (Applicant projected 25-30 percent subscription rate)

Conjecture
	“We are currently achieving a penetration rate of 10% of the households without an aggressive marketing campaign.  Once we launch our advertising campaign, we expect to achieve a 30% subscription rate”

**Market Survey - Results**

- Do _not_ base results on:
- National Statistics
*	**“**No direct mailer or door-to-door surveys were completed since past history for broadband service clearly demonstrates the need.  See OPASTCO web page ... for details of rural survey for broadband subscription rates...” (Applicant projected 25-30 percent subscription rate**)*
- Conjecture
*	**“**We are currently achieving a penetration rate of 10% of the households without an aggressive marketing campaign.  Once we launch our advertising campaign, we expect to achieve a 30% subscription rate”*

**Notes:**
These are a couple of examples of what not to do:

Don’t base you results on national statistics – these are averages across all demographics. (Read example)

Also, don’t base results on “feelings” (Read example)

There is no basis for those subscriber projections.

## Market Survey

- In the end...The market survey must support the applicant’s subscriber forecast, both in total numbers and in distribution among service offerings.**Note**:  Some financial models are highly dependent on a certain percentage of subscribers taking higher data rates at the higher prices

**Market Survey**

**Notes:**
Read Slide.

For note – be sure that the results support the distribution across different service levels.

## Market Survey

**Market Survey**

- One last thing – market surveys are only considered valid if conducted within 6 months preceding the date of submission of the application to Rural Development.

**Notes:**
Read slide.

If application is returned as incomplete and more than six months have passed before it is resubmitted RUS will require an update to the market research to identify any additional competitors that may have entered the market.

Any questions on the market survey and research?

## Financial Information

**Notes:**
Moving on to the financial information requirements of the loan application.

## Financial Information

- Provide sufficient financial information for Rural Development to determine that the loan will be feasible and adequately secured
- Forecast analysis should be based on knowledge of the external and internal factors that affect the company’s operations
- Historical and projected financial statements required

**Notes:**
RUS requires sufficient financial information to determine whether the proposed project is feasible – that timely payments can be made, and the loan is adequately secured.

We do this thru an analysis of the company’s historical financial performance, if available, and of the projected financial condition of the company once the project is fully operational.

## Historical Financial Statements

- Certified financial statements for the last 3 years (or for as long as applicant has been in business if less than 3 years)
- Audited statements are preferred, if available
- Balance Sheet
- Income Statement
- Statement of Cash Flow

**Notes:**
RUS would like 3 years of historical statements, preferably audited.  Not necessary with a start-up operation.

The statements should be a balance sheet, income statement, and statement of cash flow.  

## Historical Financial Statements

- If applicant is a subsidiary of another company, parent’s financial statements are also required.
- If another affiliated company is providing operations and/or management services to the applicant, that company’s financial statements are required.

**Notes:**
If applicant is a subsidiary, we require financial statements of the parent.

Additionally, if an affiliated company is providing services to the applicant – such as management, billing, collection – RUS requires the financial statements of that affiliate to determine the ability of that company to perform the services.

## Subscriber Projections

- Provide projections on a yearly basis for      5 years
- Include existing and proposed communities
- Breakdown by each community and by the types of services proposed
- MUST correspond with market survey results

**Notes:**
For the proforma, we need to see 5 year subscriber projections.  This must be broken down by community served and by each type of service.  

Schedules N-2A, B, and C in the Application Form 532 booklet provide a format for presenting the information.

The subscriber forecast must be supported by the results of the market research.

## 5-Year Financial Forecast

- Must be inclusive of _**ALL**_ operations of the applicant
- Must include a balance sheet, income statement, and statement of cash flow
- Must include _**detailed**_ assumptions that support the projected numbers

**Notes:**
Schedules N-3A, B, and C provide a format for presenting the proforma balance sheet, income statement and statement of cash flows.  This is a suggested format and can be modified to fit your operations.

The forecast must be inclusive of all of the operations of the applicant.  If an electric utility is applying the proforma must include all projected revenues, expenses, assets, and liabilities of the electric operations as well as the proposed broadband service.  If the electric utility forms a subsidiary to offer the service, then the forecast will cover only the operations of the subsidiary.

The forecast must be accompanied by detailed assumptions, clearly explaining how the forecast was developed.  A suggested format is presented as Schedule N-3D and sample assumptions are included as Attachment 1 in RUS Bulletin 1738-1, the application guide.

RUS uses the assumptions to validate the financial forecast to ensure the applicant’s operations are portrayed accurately.  RUS also evaluates the assumptions for reasonableness and may make adjustments to present a more likely scenario.

The following slides show examples of revenues and expenses which may need to be included in a forecasted income statement.  It is not an all-inclusive list.

## Revenues

- Broadband Revenues
- DSL, Wireless, and Cable Modem
- Sales Revenues
- Cablevision (TV) Revenues
- Telecom Revenues
- Local and Long Distance
- Dial-Up Internet Revenues
- Access/Connecting Company Revenues
- Web Hosting/Storage Revenues

**Notes:**
Read thru slide

## Expenses

- Cost of Goods Sold
- Access/Transport Fees (T1, DS3, etc.)
- Programming Expenses
- Cable and Spectrum Leases
- Connecting Company Fees
- Depreciation Expense

**Notes:**
Read thru slide

## Expenses

- Interest Expense
- Salaries/Payroll Expense
- Rent/Leases (Buildings, Towers, etc.)
- Miscellaneous
- Utilities, Supplies, Insurance, Advertising, Maintenance, and Taxes
- Professional Fees (Accounting, Legal, etc.)

**Notes:**
Read thru slide

## Depreciation Schedule

- List categories of equipment and facilities and the expected useful life
- Useful life should be based on the manufacturers’ recommended useful life
- Will determine maturity of the loan
- Schedule included in guide

**Notes:**
As part of the financial forecast we need a depreciation schedule of the equipment financed by the loan. 

List the equipment, the dollar amount to be spent, and the expected useful life – based on manufacturer’s recommendations.

This schedule will be used to determine the maturity of the loan.

In general a wireless loan will be a maximum of 10-12 years (depending on the dollar amount spent on CPE);  wireline loans can be 15-20 years (again depending on the amount of electronics and CPE which will shorten the term of the loan)

## Outstanding Indebtedness

- Include a listing of all outstanding indebtedness, including loan maturities, interest rates, and terms and conditions
- Include a copy of all loan documentation
- Notes
- Loan Contracts/Agreements
- Mortgages

**Notes:**
And finally, applicants are required to provide the details of any outstanding indebtedness whether to RUS or another lender.  

The applicant must provide the terms of the loans – interest rate, maturity, security, and covenants.

And copies of loan documentation.

Are there any questions on the financial information requirements of the program?

## System Design

**Notes:**
One of the functions of the Engineering Branch is to review the loan applications from a technical standpoint, namely the System Design section and all the supporting information such as the project costs, the buildout schedule, the network diagram, etc.

## System Design 

- Why a System Design is required?
- Technology – minimum data transmission rate as defined in the current NOFA
- Technical parameters have been addressed

**Notes:**
The first question is why do we require a system design in loan applications. 

The first reason has to do with technology.  We need to make sure that the proposed technology can in fact meet the minimum transmission rate

The second reason why we require a system design is to ensure that applicant has addressed all the technical parameters of constructing or building a broadband network that is capable of providing all the different types of services to the projected number of subscribers.

## Consists of all the information in order to do a comprehensive technical evaluation of the proposed system

Prepared and certified by a qualified employee of the applicant’s staff or an outside consultant who is licensed in the state where the facilities will be constructed

**System Design**

- Consists of all the information in order to do a comprehensive technical evaluation of the proposed system
- Prepared and certified by a qualified employee of the applicant’s staff or an outside consultant who is licensed in the state where the facilities will be constructed

**Notes:**
A system design shall consist of all the information needed in order to do a complete and thorough technical evaluation of the proposed system.

A system design has to be prepared by a qualified employee of the applicant’s staff or a consultant licensed in the state in which the facilities will be constructed.

If the applicant chooses to use someone of its staff, then the qualifications of that individual must be included in the application.

## The System Design shall include a detailed description of the following:
Applicant’s service territory
Technology (DSL, BPL, PON, cable modem, etc.)
Types of services (voice, video, and data) and corresponding number of subscribers 
Existing system (if applicable) and proposed system 
Licenses/agreements required to operate the proposed system

- The System Design shall include a detailed description of the following:
- Applicant’s service territory
- Technology (DSL, BPL, PON, cable modem, etc.)
- Types of services (voice, video, and data) and corresponding number of subscribers
- Existing system (if applicable) and proposed system
- Licenses/agreements required to operate the proposed system

**System Design**

**Notes:**
So, what should be included in a System Design?

Service Territory - First of all, the system design should give a clear and detailed description of the applicant’s service territory.  If the applicant is an existing entity,  then there should be  a detailed description of the existing service territory and of course, the new territory.
Technology – The system design should clearly indicate the type of technology that will be used to deliver broadband such as DSL, BPL, cable modem, wireless, etc.  If more than one type of  technology will be used then this needs to be stated in the system design
Types of services – The system design should also state what all the different types of services the applicant is proposing to provide and the corresponding number of subscribers for each type of service.
Existing and proposed system – The next item is a very critical item.  The system design should include a detailed description of the existing system (if any) and the one being proposed.  It should contain enough information in order to us to understand completely how the proposed network will be built. It should also explain all the different pieces of equipment that will used and their functionality.
Licenses/Agreements – The system design should also include a description on all the different licenses and agreements that are required to operate the system.

## Other items needed to support the System Design:
Project Build-out schedule 
Project Costs 
Network Diagrams
Environmental Report

**System Design**

**Other items needed to support the System Design:**
- Project Build-out schedule
- Project Costs
- Network Diagrams
- Environmental Report

**Notes:**
In addition to all the information that I just mentioned in the previously slide, there are other items that also needed to be included in the application to support the system design such as a build-out schedule, a budget, network diagrams and an environmental report.  I will cover each one of these items in more detail in the next few slides.

## Project Build-out Schedule
Annual Basis
Projects should be shown on a community/site basis
Project Costs
Includes loan funds & non-loan funds to be spent over the loan forecast period 
Schedules Q-1 through Q-11 should be completed accordingly 
Information supporting the costs in each schedule should also be included

**System Design**

- Project Build-out Schedule
- Annual Basis
- Projects should be shown on a community/site basis
- Project Costs
- Includes loan funds & non-loan funds to be spent over the loan forecast period
- Schedules Q-1 through Q-11 should be completed accordingly
- Information supporting the costs in each schedule should also be included

**Notes:**
Project Build-out schedule is basically an implementation schedule. How does the applicant plan on implementing the proposed project?  It should list the specific projects according to each community or site and the time frame for starting and completing the project. 
Even though the current application guide requires a buildout schedule on an annual basis, it is best if this information is submitted on a quarterly basis especially for wireless network since they have a very aggressive deployment period.

Project Costs – We need to know how much the proposed project is going to cost.  These project costs should be based on all the capital expenditures that the applicant will incur over the 5-year loan forecast period.  It should include not only the funds requested from us but also any capital expenditures that will be financed through other sources.  Schedules Q-2 through Q-11 in the application breakdown the project costs according to each budget category, such as Network & Access Equipment, Outside plant, CPE, engineering, etc.

In addition to the Schedule Qs, the applicant should also provide a detailed breakdown to support the project costs shown on each Schedule Q.

## Network Diagrams
Existing & Proposed Network
Block diagrams that clearly show the flow of traffic from the subscriber to the backbone network
Wireless Networks 
Approximate coverage area of each radio site 
Communities should be clearly marked 

**System Design**

- Network Diagrams
- Existing & Proposed Network
- Block diagrams that clearly show the flow of traffic from the subscriber to the backbone network
- Wireless Networks
- Approximate coverage area of each radio site
- Communities should be clearly marked

**Notes:**
The Network Diagram is an integral component in the application because it shows us how the network will be laid out.  
These diagrams need to be submitted for both an existing network of the applicant ( if there is one) and the proposed network.

The Network Diagrams should be block diagrams that clearly show the flow of traffic from the subscriber to the backbone network. These diagrams cannot be generic diagrams; they must be specific to the applicant’s network.

For wireless networks, we also need to see coverage area maps for each tower site.  These maps should clearly show the approximate coverage area of each site.  In  addition, the map for each site should also clearly indicate the communities that will be served.

## All construction proposed in the loan application must be covered by an Environmental Report.
The Environmental Report must be prepared in accordance with 7 CFR Part 1794.
CFR and guide for preparing the Environmental Report is available on the web site
http://www.usda.gov/rus/telecom/publications/html/1794.htm
http://www.usda.gov/rus/telecom/publications/word_files/1794a600.doc
7 CFR Part 1970 - New environmental regulation under development

**Environmental Report**

- All construction proposed in the loan application must be covered by an Environmental Report.
- The Environmental Report must be prepared in accordance with 7 CFR Part 1794.
- CFR and guide for preparing the Environmental Report is available on the web site
- _[http://www.usda.gov/rus/telecom/publications/html/1794.htm](http://www.usda.gov/rus/telecom/publications/html/1794.htm)_
- _[http://www.usda.gov/rus/telecom/publications/word_files/1794a600.doc](http://www.usda.gov/rus/telecom/publications/word_files/1794a600.doc)_
- 7 CFR Part 1970 - New environmental regulation under development

**Notes:**
And finally, the application should include an Environmental Report covering all the construction proposed in the application.
The current environmental regulations are in 7 CFR Part 1794.  We also have a guide that can help the applicants with the preparation of the Environmental Report.  This guide is available at our web site.

Please note that our Environmental Branch is currently in the process of revising the Environmental Regulation.  This new regulation will be under 7 CFR Part 1970.  

## Application Review Process

**Notes:**
This pretty much wraps up the system design section.  Does anyone have any questions on what I have covered so far before moving on to a different topic.

The next topic I am going to cover is what is the application review process.

## Review Process 

- 1.  Initial Review
- 			2.  Detailed Review
- 					3.  Loan Committees

**Notes:**
When the application is received in Washington DC, it basically goes through 3 stages before it is approved.  

The first stage is the initial review stage, followed by a detailed review and finally putting the loan packet together and presenting the loan to the loan committees.

I will cover each of these steps in more detail in the next few slides. 

## Initial Review

- Purpose
- Regulatory & Statutory requirements have been met
- Essential information to do a detailed financial & technical analysis
- Application will fall into 1 of 3 categories
- Complete
- Incomplete
- Return

**Notes:**
So, what is the purpose of doing an initial review – to ensure that 
The applicant meets all the regulatory requirements as far eligibility, credit support, service territory, TIER etc.
All the information that is needed to go forward and do a thorough analysis from both a financial and technical perspective has been provided.

Based on the initial review, the application will fall into one of three categories
Complete – all the requirements have been met and all the necessary information has been provided to go to Stage 2 of the review process
Incomplete – Most requirements have been met; however there were certain parts of the application that either needed further clarification or additional supporting information.  In this case, we call the application incomplete and ask for the information to be submitted within certain time frame depending on the type of information that is needed.
Return – The last category is the return category.  An application will fall into this category because certain regulatory or statutory requirements have not been met and/or the information included in the application is so insufficient such that in order for the applicant to address all the discrepancies would require an entire re-submission on the application.

## Detailed Review

- In-depth financial analysis
- Feasibility Studies
- Sensitivity Studies
- Comprehensive technical evaluation
- Capable of providing required bandwidth
- Cost estimates
- Service territory

**Notes:**
Once an application is complete, we then proceed with our detailed review.  This review involves an in-depth financial analysis of the applicant’s past history (if any) and the projected numbers in the proforma.
As part of the financial review, a feasibility study is prepared on an annual basis to analyze the financial performance.  In addition, sensitivity studies such as reducing the revenues projections across the board or reducing the projected number of subscribers for a certain type of service are also conducted to determine the financial impact
On the technical side, a comprehensive evaluation of the entire system is conducted to ensure that the proposed network to be built will deliver the proposed services to the projected number of subscribers, all the necessary licenses/agreements that are needed to operate the system have been identified and addressed and finally all the projects costs have been included in the budget.

## Loan Committees

- Assistant Administrator’s Loan Committee (AALC)
- Senior Loan Committee (SLC)

**Notes:**
All broadband loan applications have to be reviewed by the Assistant Administrator’s loan committee.  Most also have to go to the Senior Loan Committee – there are some instances, mostly based on amount/history, where they do not go to SLC.

## How long does it take to get approved?

*(Numbers in bars indicate total applications approved during respective years.)*

***Months***

- 4

- 32

- 17

- 11

- 10

## Legal Requirements

- Loan and Security Documents
- Loan Agreement
- Mortgage
- UCC Statements
- Promissory Note
- Closing Instructions

**Notes:**
Once a loan is approved, RUS transmits the legal documents for loan closing.  These include a loan agreement or a loan and security agreement for those without real property;
the mortgage, for those with real property;
A promissory note,
And detailed instructions for executing the documents, and sending them back to RUS for clearance.

## Legal Requirements

- Satisfaction of Legal Requirements
- Executed Loan and Security Documents
- Regulatory/Commission Approval
- Certificate of Resolutions
- Evidence of UCC Filing
- Executed Pledged Deposit Account Agreement
- Attorney Opinion

**Notes:**
Before documents can be cleared RUS needs to have properly executed loan and security documents;
Evidence that any regulatory or commission approvals have been obtained, if necessary;
Certificates of resolutions;
Evidence that all UCC’s are properly filed;
And executed Pledged Deposit Account Agreement – this is the account where loan funds will be deposited by RUS;
And an attorney’s opinion – a form of which is sent to the borrower with the legal documents.

## Release of Loan Funds

- Clearance of Loan and Security Documents
- Submission of Current Financials
- Executed Certificate of Authority

- Executed Automated Clearing House (ACH) Form
- Evidence of Fidelity/Theft Insurance Coverage
- Evidence of Satisfying Additional Conditions

**Notes:**
In order for loan funds to be released – and advances made to the borrower RUS must clear the documents;
The borrower must submit current financial statements and an executed certificate of authority – this document certifies who from the borrower’s staff is permitted to request funds.

## Quarterly Reports (New Web-based system)
Financial Reports – Balance Sheet, Income Statement, and Statement of Cash Flows
Construction/Subscriber Reports – showing the number of sites/communities in operation and the respective number of subscribers
Annual CPA audits
Follow guidelines in 7 CFR Part 1773

**Reporting Requirements**

- Quarterly Reports (New Web-based system)
- Financial Reports – Balance Sheet, Income Statement, and Statement of Cash Flows
- Construction/Subscriber Reports – showing the number of sites/communities in operation and the respective number of subscribers
- Annual CPA audits
- Follow guidelines in 7 CFR Part 1773

## Construction Procedures

**Construction Procedures**

- All construction financed by Rural Development loan funds must be performed in accordance with RUS Bulletin 1738-2, Rural Broadband Access Loan and Loan Guarantee Program, Advance and Construction Procedures Guide.
- The guide is available on our web site at:
- _[http://www.usda.gov/rus/telecom/broadband.htm](http://www.usda.gov/rus/telecom/broadband.htm)_

## Advance procedures are covered in 1738-2. 
Borrower submits a request for funds on Financial Requirement Statement – RUS Form 481
Funds can be requested for:
Approved contracts (equipment, construction & engineering)
Completed work orders
Work Order Fund 
Acquisitions & Refinancing (if approved in the loan)

**Advance Procedures**

- Advance procedures are covered in 1738-2.
- Borrower submits a request for funds on Financial Requirement Statement – RUS Form 481
- Funds can be requested for:
- Approved contracts (equipment, construction & engineering)
- Completed work orders
- Work Order Fund
- Acquisitions & Refinancing (if approved in the loan)

## Funds are wired into the Pledged Deposit Account
Pledged Deposit Account shall only be used to advance and disburse loan funds and no other purpose
Funds should be only be disbursed for the purposes as approved on the RUS Form 481
First advance should be used to pay-off any interim debt 
Any equity funds proposed to be used for plant investment, as part of the 20% credit support requirement, must be deposited in the Pledged Deposit Account

**Advance Procedures**

- Funds are wired into the Pledged Deposit Account
- Pledged Deposit Account shall only be used to advance and disburse loan funds and no other purpose
- Funds should be only be disbursed for the purposes as approved on the RUS Form 481
- First advance should be used to pay-off any interim debt
- Any equity funds proposed to be used for plant investment, as part of the 20% credit support requirement, must be deposited in the Pledged Deposit Account

## Questions and Answers 

- 	At this time, please feel free to ask all of the questions that you have been thinking about.

## Contact Information

- Dimitri Kombolias
- Southern Operations Branch
-  Broadband Division
- _[dimitrios.kombolias@wdc.usda.gov](mailto:dimitrios.kombolias@wdc.usda.gov)_
- 202.690.4673