Fibre Broadband Shares

[Snoopy]

One of the more successful government interventions in NZ has been the building of a nationwide fibre broadband network. Did I say nationwide? There are still rural pockets where fibre broadband does not reach. In those areas the also government funded RBI or 'Rural Broadband Initiative', a joint venture with Vodaphone building the towers and Chorus supplying the interconnecting cabling, fills the gaps. Nevertheless NZ is surprisingly well connected by global standards with fibre broadband even in the quite small rural centres. Why did the government get involved? There was worth in building an integrated fibre broadband network all at once in advance of market demand, rather than a fully privately funded piece wise approach that responded to market demand. Private business on its own would have struggled to justify the large capital expense needed to lay out a full fibre network before most customers were ready to adopt it. So the national level government became involved in the fibre network roll out from 2011 via 'Crown Fibre Holdings' (CFH), that was renamed 'Crown Infrastructure Partners' (CIP) by the time FY2018 came along. Chorus has yet to finish its part in the fibre broadband roll out. So new 'CIP Units', triggered upon a fibre broadband network builder reaching certain construction targets, are still being issued today. The term 'Crown Infrastructure Partners' reflects the fact that each particular broadband builder still needed to contribute their own separate funding towards the fibre roll out.

'CIP units' in the form of interest free debt ('CIP Debt') and delayed dividend payment preference shares ('CIP Equity') got built into the balance sheet of Chorus, for example. However, the associated crown subsidy takes the form of a time discounted value of 'CIP units'. There is no capital discount on the 'CIP debt', all of which has to be eventually repaid. Having said this, having interest free access to funding for up to 25 years is obviously a significant benefit to those government anointed fibre broadband network builders and owners. The first repayment date of 'CIP debt' is FY2025. That would have seemed a long way away back in 2011. But now 2025 is less than four years away, even of the final tranche of 'CIP Debt' is not due to be repaid until FY2036. Unlike 'CIP Debt', 'CIP Equity' does not have fixed capital repayment dates. But it does have an ever increasing onerous 'dividend demand regime', starting from FY2025, which is equivalent to an ever increasing interest rate. In today's interest rate climate, it would certainly make sense to either 'repay' or at least 'refinance' these preference shares by replacing them with present day much lower coupon rate equivalent debt. I say this without full information of what sort of revenue stream the likes of these fibre network providers will attract, or more correctly will be allowed to attract (because maximum revenues are government controlled) in the future. It is possible that allowable revenue growth will be sufficient that it will be 'capital efficient' for these broadband network owners to retain a higher level of company debt than is prudent today. But my gut feeling is that from now on growth in broadband revenue will be ever more difficult to achieve as customers reach saturation and the need to upgrade to a 'premium' speed service plateaus. Yet some government control on revenue is always going to happen, because of the natural monopoly that is a wholesale fibre network provider.

SNOOPY