Funding the Second Age of CLECs

Today’s capital markets have made it increasingly difficult for CLECs to find affordable financing. In the past, aggressive lenders lurked at every corner. Now, lenders are increasingly cautious and unwilling to take risks without more solid exit strategies. Additionally, rising corporate defaults are generating higher rates, sending many CLECs in search of new ways to generate financing.

To grow and stay competitive, CLECs must continue to build out, focus on customer services and offer more services, such as bundled voice and data. More importantly, they need to distinguish themselves from the pack; not an easy task by any means. By setting themselves apart, these businesses can attract the kind of capital needed to move forward and flourish.

CLECs’ niche market is providing bundled services to under-served ILEC customers. In this spirit, CLECs need to continue to define their opportunities carefully and manage their capital. In addition to capital conservation, CLECs have to manage an ever-growing array of other financing problems. Successful implementation of current capital makes any CLEC a more qualified candidate for additional financing.

CLEC startups must seek out structured financing to earn money to build their customer base, yet defer amortization until they can generate customer revenues. After gaining this initial financing, they then need to take a solid look at their business plans and determine what their next step should be.

While many CLECs have reached this point in their business life span, they still have to obtain capital in order to install more lines and maintain those lines, as well as deal with ILEC line provisioning. As a result, they often fall behind in their business plans. This means less capital on hand, which negatively impacts any future capital intensive projects. With all these factors in mind, how can a CLEC attract financing in such a volatile market?

One of the first things they need to do is prepare for the worst and become forward thinkers. Executives at many companies now realize they can’t obtain all the financing required to complete their optimal business plans. Consequently, they should be prepared to scale back their business plans, conserve capital and consolidate their resources. By looking ahead and anticipating tough times, CLECs will be ready to set up alternate plans when the capital markets cool off again.

CLECs also can make themselves look attractive to investors by cultivating and attracting a strong management team. Strong management gives investors and lenders more will to consider a potential investment. Investors then look to the management’s past and present successes to gauge risks. Some of the management teams that GE Capital has financed also focus on conserving “management bandwidth,” directing their key people toward “Have-to-Do’s” rather than “Nice-to-Have’s.”

Looking toward the future, CLECs will need to formulate a plan that is more manageable than the ones of the past. As the market cools — and investors become even harder to find — a CLECs grand plan to expand and grow may be somewhat of a pipe dream. In reality, businesses with reliable management, a realistic plan and a long-term strategy will be more likely to attract capital than those will with unproven results or capital-intensive expansion plans. The capital that these companies attain will have to be capital distinguished by knowledge — meaning money that will have distinct, manageable and attainable uses. The CLECs that possess this “distinguished knowledge” will fare the best in such an unfriendly market.

Susan Hanna is a managing director at GE Capital Markets Services and is in charge of the company’s capital markets efforts in telecom. She can be reached at susan.hanna@gecapital.com.
Brian Ward is managing director of GE Capital Global Telecom. He can be reached at brian.ward@gecapital.com.