Community Wireless Communications Co.
Responses to Lawrence City Questions

 

September 24, 2014

 

1.       Can we get some financial information from wicked so we can feel comfortable in this transaction?

 

Yes, however, Wicked wishes to avoid repeating the same financial due diligence multiple times.  We have already provided extensive financial information including balance sheets, P&L statements, EBITDA, financial projections.  In addition the City’s consultant, the Springsted Group pulled the company’s Dun & Bradstreet profile.  Springsted’s report can be found on the City of Lawrence website:

 

https://www.lawrenceks.org/assets/boards/pirc/01-21-14/fai_wicked_fiber_springsted_report.pdf

 

Since this report was issued 11 months ago, Wicked’s monthly revenue has grown by 19%, resulting in year to year sales growth in excess of 20%.

 

2.       What guarantee do we have to limit excessive pricing on the common carrier threads that Wicked will put in?

 

As proposed under 3.4.1 of Wicked’s prospectus, which was sent to city management on September 19, 2014:

 

      3.            Loan proposals for Downtown and East Lawrence Fiber Project

                       3.4.            In exchange for financial assistance, CWC commits that any city-backed buildout will:

                                         3.4.1.            Be operated as a common carrier network with low fixed wholesale costs available to any interested party

                                         3.4.2.            Prices to be fixed as follows and adjusted annually based on the consumer price index as published by the Bureau of Labor Statistics

                                                          3.4.2.1.            Monthly wholesale cost - $25.00 per month per drop (2014 Dollars)

                                                          3.4.2.2.            Activation fee - $50.00 per drop, adjusted for CPI

                                                          3.4.2.3.            Minimum wholesale order - 100 drops

                                                          3.4.2.4.            Deposit - 3 months

                                                          3.4.2.5.            Any price increases in excess of the agreed pricing would require approval from the City Commission.

 

 

3.       If there is a default can we have information from the applicant that would inform us to who else would be using the system as collateral.

 

Douglas County Bank has a note out to Wicked for $316,445 which uses the company’s existing network infrastructure as collateral.  Emprise bank has second position with a note for $138,071.

 

4.       Why does the bank need guarantees?

 

The bank needs guarantees for the same reason that the economics of broadband require city involvement.  From September 19 prospectus:

 

      3.            Loan proposals for Downtown and East Lawrence Pilot Project

                       3.1.            Why the city needs to be involved

                                         3.1.1.            All projects of this type require extensive involvement from municipalities.  To create a financially sustainable network takes either a massive investment of capital and national scale (Google Fiber) or participation from taxpayers (Longmont Colorado, Chanute Kansas, Chattanooga Tennessee, Lafayette Louisiana)

                                         3.1.2.            Financial viability requires low interest rates and long payment terms (patient capital).  Without city participation, no fiber project will be viable (i.e. project meets “but for” threshold).

                                         3.1.3.            Banks do not collateralize network projects in the same way they do real estate.  Similarly, banks do not collateralize roads, electrical grids, or water and sewage projects.

 

5.       What assets does Wicked have on the line?

 

Wicked manages network assets with an undepreciated value of $1,708,270.

 

6.       What happens if the company defaults on the loan?

 

1.      The bank will inform the City that the loan is in default.

2.      The City and Wicked would work with the bank to attempt to settle the debt or alter payment terms.

3.      If no acceptable compromise was possible, the bank would foreclose.

4.      The City would have the option to make payments, or pay the balance in full.

5.      The City would take possession of the network subject to existing encumberances and either operate or liquidate the system.

6.      According to the City’s consultants, CTC, the value of similar networks is $1,000 to $2,000 per drop.

 

7.       What is the current solvency of the company?

 

Community Wireless Communications Co. DBA Wicked Broadband has been in business since January 9, 2006.  The company has year to year sales growth of more than 20% and is meeting its financial obligations to lenders, vendors and employees.

 

8.       Regarding the $1 million loan guarantee- what risk is the bank taking?

 

If the bank calculated that Wicked would be unable to service the note, the bank would not write it under any circumstances.  The bank’s willingness to participate in the project is a strong demonstration of support for the concept.

 

The bank takes the risk that Wicked will be unable to pay and will default on the loan.  The bank values the collateral at zero dollars because it is a specialty asset with a limited resale market.  The infrastructure itself has little value for the bank since it cannot be removed or sold.  This is similar to a water main or electrical pole which is of little value: the value of the asset is when it is in service as a system, not in the individual parts.

 

Post-2008, the banking sector requires collateral and down payments well in excess of the value of loan proceeds.  In the proposed scenario, the bank has no collateral position since it cannot liquidate the asset.

 

Though banks routinely collateralize fixed assets, they only do so with a substantial down payment from the borrower and a federal loan guarantee from the SBA, Fannie Mae, or Freddy Mac.  In almost every case the bank has collateral and guarantees well in excess of the loan value.

 

The bank is not an equity partner.  They do not have “skin in the game” or the ability to operate a network.  They are a heavily regulated quasi-public institution with stringent requirements for collateralization and security.  The bottom line is that Wicked’s banking partner is willing to underwrite this project only in so far as the City is willing to guarantee its position.