On June 7, 2024, the Federal Communications Commission ("FCC") issued a Notice of Proposed Rulemaking ("NPRM") seeking comment on proposed changes to its Letter of Credit ("LOC") rules and related requirements for broadband providers participating in and receiving support from the Universal Service Fund High Cost Programs. Specifically, the FCC is seeking comment on key issues that could substantially alleviate some of the burden on providers in securing and maintaining LOCs, including:
- Expanding the eligibility requirements for banks that can issue LOCs for current and future USF High Cost Programs;
- Modifying the optional milestone verification eligibility requirements for Rural Digital Opportunity Fund ("RDOF") support recipients; and
- Permanently aligning Connect America Fund Phase II ("CAF II") LOC rules with RDOF LOC rules, consistent with the most recent waiver granted by the agency in 2023.
If adopted, these proposed rules would allow lower collateral requirements and free up capital that could be used to build out networks and increase the number of eligible banks, creating a more competitive market for securing LOCs under favorable terms. Therefore, recipients of CAF II and RDOF support, and potential participants in the 5G Fund (or other federal funding opportunities, such as BEAD) should carefully review these proposed rule changes. Interested parties can file comments by August 5, and reply comments by August 19.
Potential Changes to Eligibility Rules for Banks Issuing LOCs
Under current rules CAF II and RDOF winning bidders are required to secure a LOC from an eligible bank and file the LOC with the Universal Service Administrative Company ("USAC"). The FCC and USAC will only accept LOCs from U.S. banks that maintain a Weiss bank safety rating of B- or better. If a bank's Weiss rating drops below a B-, a provider's support is withheld until they obtain a new LOC from a qualifying bank — often resulting in increased costs and additional administrative burdens that detract from broadband deployment. These rules provide the FCC a means to protect the Universal Service Fund by drawing on the LOC to recoup disbursed funds in the event that a winning bidder defaults on their deployment obligations.
Over the last two years, the number of eligible banks that satisfy the FCC's LOC rules decreased significantly, resulting in several CAF II and RDOF recipients seeking waivers of LOC rules to avoid finding a new bank to issue a replacement LOC. Responding to the increase in requests for LOC waivers, earlier this year the Wireline Competition Bureau ("Bureau") issued an order that temporarily waived the Weiss safety rating requirement for a year. Recognizing that these bank eligibility requirements may have increased burdens on support recipients and hindered broadband deployment efforts, the FCC is now seeking comment on how to increase the number of U.S. banks eligible to issue LOCs, while balancing its ability to act in the event of default on deployment obligations.
The NPRM presents three proposals to determine bank eligibility but also seeks comment on other alternatives.
- Expand Eligible Banks by Using Lower Weiss Ratings: The FCC is considering continued usage of the Weiss safety ratings, but expanding the number of eligible banks by permitting participating banks to have a lower bank safety rating than currently allowed (B-), in recognition of the fact that the majority of Weiss-rated banks (3,923 of 4,526) have a safety rating of C- or better. Reducing the acceptable rating to C- would make more than 2,000 additional banks eligible.
- The Bank of America ("BOA") Proposal: BOA proposes that banks should be deemed eligible if the bank has either: (1) a Weiss bank safety rating of B- or better; or (2) a long-term unsecured credit rating issued by a widely recognized credit rating agency that is equivalent to a BBB- or better rating by Standard & Poor's (the requirement for non-U.S. banks).
- The Bank Policy Institute ("BPI") Proposal: BPI proposes that the FCC stop using Weiss safety ratings. Instead, the FCC should accept LOCs from any federally supervised bank with an investment grade-rating for banks of $100 billion or more in total assets or with a certificate that the bank is well capitalized for banks with assets below $100 billion. BPI argues that the FCC should not use credit-rating organizations because this approach is inconsistent with Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which requires all federal agencies to "remove any reference to or requirement of reliance on credit [e.g., safety] ratings."
Potential Changes to RDOF Milestone Deployment Rules
FCC rules require that RDOF providers maintain a LOC from an eligible bank until USAC completes a verification review and determines all deployment obligations are satisfied. The LOC should cover one year's worth of the provider's total funding the first year and increase each subsequent year until year four: 18 months of support in year two, 24 months of support in year three, and 36 months of support in year four. At any time, RDOF providers can request a verification review at a deployment milestone — the optional 20% by the end of year two or the required 40% by year three, 60% by year four, or 80% by year five — and if the review is successful, they may lower their required LOC to one year total support for the remainder of the program until their deployment obligations are satisfied.1
The FCC seeks comment on how to reduce the financial burden on providers and free up capital for broadband deployment by modifying the optional milestone rule (but not the required deployment milestone rules). The FCC proposes lowering the optional milestone from 20% to 10% by the end of year two. If adopted, a provider can demonstrate it deployed to 10% of their required locations by the end of their second year in RDOF and may then request a USAC verification review and maintain a LOC with one year of support until it satisfies 100% of its buildout obligations. The FCC asks whether 10% deployment is sufficient evidence to demonstrate a provider is actively making progress on its deployment obligations, and also seeks comment on whether these proposed changes should apply to recipients whose two-year optional milestone has already been met. The FCC specifically highlights that there would not be much financial relief for providers authorized in 2021 because they are still required to meet the required 40% milestone by December 31, 2024.
Potential Changes to CAF II LOC Rules
The FCC's CAF II LOC rules require providers to maintain a LOC equal to the amount of support that has been disbursed and will be disbursed in the coming year until USAC has verified that the provider has met all deployment obligations. This means, beginning with 12 months of support for the first year, CAF II providers must increase their LOC with an additional 12 months of funding each year of the six years until USAC verifies 100% deployment. Currently CAF II providers can only complete verification reviews at two milestones — the 60% milestone to reduce their LOC to 90% of the total support amount plus the total support amount for the upcoming year; and the 80% milestone to reduce their LOC to 60% of the total support amount plus the total support amount for the upcoming year.
The FCC proposes making the CAF II LOC rules permanently mirror RDOF LOC rules. Therefore, if adopted, LOCs would cover one year's worth of the provider's total funding the first year and increase each subsequent year until year four: 18 months of support in year two, 24 months of support in year three, and 36 months of support in year four. CAF II providers could also subsequently reduce their LOC to one year of support upon successful completion of a verification review at any deployment milestone.
DWT will continue to monitor developments with the FCC's proposed LOC and bank eligibility rules and will publish further analysis as rulemaking continues.
Footnotes
1. Providers can request a verification review from USAC at any milestone at any time. Undergoing a USAC verification review could free up capital that is otherwise inaccessible as collateral required for a letter of credit.
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