Open Range Files for Bankruptcy Despite Major RUS Broadband Loan Commitment

Open Range Communications filed for bankruptcy Thursday despite receiving the largest loan commitment under the Agriculture Department’s Rural Development Broadband Loan and Loan Guarantee Program. The Rural Utilities Service approved a loan of $267 million for Open Range in March of 2008, under President George W. Bush appointee RUS Administrator Jim Andrew. Open Range owes RUS about $74 million in secured debt, said the company.

The FCC’s decision to stop allowing Open Range to use spectrum it leased from Globalstar was among the reasons for its collapse, bankruptcy court filings say. The failure of government-supported businesses has faced new attention following the bankruptcy of solar-company Solyndra.

"The loan with Open Range Communications was announced in 2008 and finalized days before this Administration took office,” said an RUS spokesman. “In April 2011, USDA restructured the loan to reduce the government’s exposure. USDA will be working with the Department of Justice on behalf of the American people to protect the federal government’s interest in the loan. While we are of course disappointed this company did not succeed, rural infrastructure loans are essential to economic development in many communities throughout the country and 99% of these loans are repaid successfully."

An FCC decision last year was a major reason for Open Range seeking Chapter 11 bankruptcy protection in U.S. Bankruptcy Court in Wilmington, Del., said the bankruptcy filing. The FCC in Sept. 2010 declined a request from mobile satellite service operator Globalstar that would allow it to continue to lease its ancillary terrestrial component spectrum to Open Range (CD Sept 16/10 p6) for WiMax services. The FCC later granted Open Range special temporary authority (STA) to continue operations in the band, though limiting the expansion of Open Range until it found new spectrum.

An eventual RUS termination notice and the limited STA “created significant uncertainty with vendors and suppliers and caused some vendors to reduce efforts or altogether exit projects which led to a general slowdown of construction and employment activity,” said the filing. Open Range has been operating in Globalstar’s ATC spectrum through STAs ever since the FCC decision, though last November it signed a letter of intent to be the exclusive rural partner for LightSquared and had discussions with Clearwire for use of its spectrum. Open Range and the FCC declined to comment.

RUS voiced strong concern at the time over how the Globalstar decision would affect Open Range (CD Sept 20/10 p1) “The Open Range loan represents the single largest loan of the RUS Broadband Program,” RUS Administrator Jonathan Adelstein warned in a letter to the FCC last year as the FCC was considering Globalstar’s ATC request. “A loan failure of a large magnitude could significantly affect the subsidy rate of the program and necessitate larger Congressional appropriations, or would otherwise result in what could be a major reduction of the agency’s present lending level.” Such a result “would be contrary to the mission of the RUS and the Commission’s shared goal of expanding broadband throughout the U.S., especially during this time of constricted private capital."

From June 2010 to April 2011, RUS funding became “more sporadic,” said Open Range. The RUS money comes as advances for preapproved contracts or reimbursement and only one funding request is accepted per month, said Open Range. In April, RUS amended its loan commitment to $180 million. Since then, RUS only processed one of Open Range’s funding requests, it said. In a Sept. 22 meeting between the Open Range and RUS, the company learned RUS would seek reimbursement of $23 million RUS said was improperly advanced, said the filing. As of Sept. 30, Open Range had assets of $114 million, liabilities of $110 million and Open Range’s 2010 fiscal year ended with revenue of $1.7 million with a loss of $50,300, the filing said.

"This partnership will address the significant need to deploy wireless, portable broadband connectivity to improve service in considerable portions of rural America,” RUS said in a press release announcing the loan commitment in March of 2008. “The commitment by USDA and Open Range represents one of the largest public-private investments for broadband service by the federal government.”

It appears that the Open Range project lacked careful review and assessment when it was approved in 2008 during the Bush Administration, said broadband consultant Craig Settles. With the bankruptcy filing, there’s little option for the RUS and FCC, he said. There has to be strong assessment and oversight in any government grant/loan, he said.

"Without attributing ill intent to anyone in approving the $267 million RUS loan, I know enough to know that the government is just not very good at picking winners and losers in the marketplace,” said Randolph May, president of the Free State Foundation. “And when you combine that inability with contingencies inherent in the need to secure special regulatory changes, you've got a recipe for potential disaster, with the taxpayer left holding the bag."

"It’s not a matter of picking winners and losers,” said Seton Motley, president of Less Government. “They're picking losers at the expense of winners. They're taking money from winners to give to losers. That’s what they're doing here."

Public Knowledge Legal Director Harold Feld said he expected conservative groups to criticize RUS for problems at Open Range. “I expect the right to try to make hay from it, the same way they have from Solyndra and LightSquared,” Feld said. “The problem for the folks on the right is that the RUS loan was made by the Bush Administration. I do think it will be held up as an example of how government ‘is bad at investing/can’t pick winners/can’t do anything right’ and will probably be used by those trying to claw back BTOP money. As usual, it will be all about the one or two failures and ignoring the much larger number of quiet successes.” Feld said RUS deserves credit for taking a chance on a new competitor. “Anyone who wants to see the government support programs that go beyond the safest bet of giving money to large incumbents needs to defend RUS for taking a risk,” he said. “Whenever you take risks by funding projects designed to foster new technologies or new business models, some will fail. If you ask, ‘why does USF money always go to incumbents pushing the same business models,’ part of the answer is ‘because it’s safe.'"

"At first blush, Open Range’s troubles would appear to give Republicans more ammunition against Obama Administration broadband and green technology grant/loan programs,” wrote Jeff Silva, analyst at Medley Global Advisors. “On closer inspection, however, it seems RUS’s $266 million loan to Open Range pre-dates the current administration and therefore any GOP politicization of the RUS loan could backfire.”