FCC Hits Pause On Bank Ratings Firm After Hearing Concerns, Complaints

WASHINGTON, April 14, 2024 – In January, Consolidated Communications notified federal regulators about a financial issue that had cropped up, could do harm to hundreds of broadband Internet Service Providers, and frustrate the effort to deliver high-speed Internet service to rural America.

In a filing with the Federal Communications Commission, Consolidated said the bank from which it had received a letter of credit (LOC) – a requirement under the Rural Digital Opportunity Fund auction rules – was no longer an eligible lending institution.

Although the FCC did not provide data, the agency in the Consolidated filing was evidently looking in broad terms at a problem that involved hundreds of banks that were backstopping millions of dollars pledged to the FCC as protection against auction winners that defaulted or otherwise underperformed in a manner that would trigger payment to the agency.

Under the FCC’s rules, an LOC had to come from a bank with a Weiss rating of at least B-minus. Consolidated’s bank had just dipped to C plus. The FCC’s rules stipulated that an inferior Weiss rating required the suspension of RDOF support until the auction winner found a new bank with a Weiss rating with at least a B minus.

Finding a new LOC provider can take time and involve additional expense. The FCC’s rules said an LOC from a qualified bank had to be equal to the amount of RDOF support in the first year.

Consolidated sought a six-month waiver from the Weiss requirement, which the FCC granted shortly thereafter. Based in Mattoon, Il., Consolidated has about 393,000 broadband subscribers located in more than 20 states.

“Absent [a] waiver for this six-month time frame, Consolidated will face suspension of support, the financial impact of which would curtail Consolidated’s fiber deployment,” the company said in the filing.

The FCC also issued an omnibus order in March effectively suspending for one year its reliance on Weiss ratings – a move sought by Bank of America and the Bank Policy Institute, which put in the FCC’s public record an analysis that portrayed the Weiss organization in strikingly negative terms.

“We have serious concerns about the reliability of Weiss ratings and their ‘bank safety’ ratings. The Weiss ratings methodology is opaque and the Weiss organization appears to lack sufficient resources to adequately assess all of the institutions it purports to rate,” BPI said in a submission dated Feb. 2 that was not posted to the agency’s website until April 11. A BPI spokesman did not return an email asking about the posting lag.

BPI also suggested Weiss had a conflict of interest. “The Weiss organization regularly promotes crypto assets as an alternative to traditional banks on its official website, calling into question the organization’s impartiality and objectiveness,” BPI said.

Weiss, based in Palm Beach Gardens, Fl., did not return an email or a phone call seeking comment on Friday. On its website, Weiss said ratings are “based on a complex analysis of hundreds of factors that are synthesized into five indexes: capitalization, asset quality, profitability, liquidity and stability.”

The company said a weak score can result from financial problems “caused by any one of a number of factors, such as inadequate capital, non-performing loans and poor asset quality, operating losses, poor liquidity, or the failure of an affiliated company.”

Consolidated’s problems with Weiss rankings likely underpinned the FCC’s decision to adopt the one-year pause. In 2020, Consolidated secured $58.9 million in RDOF support to serve 27,021 locations in portions of Florida, Illinois, Maine, Minnesota, New Hampshire, Texas, and Vermont.

The lender that issued Consolidated’s RDOF LOC was not an undercapitalized mom-and-pop bank in a strip mall, but industry giant Wells Fargo. According to the Federal Reserve, Wells Fargo is the third-largest bank in the country with $1.7 trillion in assets, trailing only JP Morgan Chase and Bank of America. Wells Fargo has solid credit ratings from Fitch, Moody's, and S&P Global.

The FCC observed that although two years ago 75% of U.S. banks had a Weiss rating of B minus or higher, the figure today is below 41%.

“Put differently, there are now more than 1,600 banks across the U.S. that are no longer able to issue LOCs to auction support recipients despite being eligible to do so two years ago,” the FCC said.

The agency added, “This significant and unanticipated change in the availability of banks qualified to issue LOCs, including banks that had issued LOCs to [RDOF] program participants and can no longer do so, amounts to special circumstances.”

Last December, the FCC announced that the RDOF auction yielded “379 support recipients with authorized winning bids totaling over $6 billion in support over a ten-year term, covering just under 3.5 million locations in 48 states and one territory.” The agency’s Weiss ratings pause was also applicable to winners in the CAF Phase II Auction in 2018.

The FCC did not provide an estimate of the number of auction winners with LOCs from banks with a Weiss rating below B-minus. The FCC said the Weiss pause relates to existing relationships between auction winners and banks that provisioned their LOCs and have Weiss ratings below B-minus. The agency will not permit an auction winner to obtain an LOC from a new bank if that bank has a current Weiss safety rating below B-minus.

The FCC’s said its initial decision to rely on Weiss was the result of finding the company to be “an independent and objective perspective of the safety of the banks it rates based on capitalization, asset quality, profitability, liquidity, and stability indexes,” and that banks with a rating of B-[minus] or higher had shown that they ‘offer[] good financial security and ha[ve] the resources to deal with a variety of adverse economic conditions.’”

On Jan. 31, Consolidated shareholders voted to approve the company’s plan to be acquired by Searchlight Capital Partners and British Columbia Investment Management Corp. for about $3.1 billion. The deal is expected to close by the first quarter of 2025.