Protecting Against the Ill Effects of a Default

It is a bit unsettling to think that part way through a broadband deployment, you can be left high and dry because the vendor can no longer sustain its operations. Yet, it seems like many broadband deployment transactions have as a concern the financial health of the vendor. There are, however, a few tools to prevent or at least dull the ill effects of a failing or failed vendor.

For instance, it is possible to include “leading indicators” in your agreements whereby, similar to negative covenants, you can take certain actions in the event the vendor fails to meet the thresholds for such indicators.  You can include a “step-in” provision whereby you can assume the role of the vendor. You can also request certain performances by certain dates; a liquidated damage provision, even though such damages would become an unsecured claim in bankruptcy; require the vendor to provide a guaranty, such as a letter of credit, a performance bond or a third party guarantor, any of which are appealing because the relationship is with a third party, such as a bank, and therefore should occur outside any bankruptcy proceeding; or you can take a security interest in the vendor’s assets regardless of whether there may be other secured parties with a superior secured right to the assets.

You could even include language in your agreements whereby both parties agree that, in the event of a bankruptcy, the vendor will stipulate to an accelerated period of time by which to make its determination as to whether to assume or reject the agreement, which would expedite the process thereby reducing the period of uncertainty. (Note, however, that the enforcement of such a provision is within the discretion of the bankruptcy court.)

With regard to an IRU, it helps to characterize it as a sale of at least the beneficial ownership of the fiber. It also helps to provide in a separate document any associated services performed by the vendor, such as the operations and maintenance of the IRU, so that they do not contaminate the sale and turn it into a service. In this manner, you should be able to decrease the chances of characterizing the agreement as a service, which can be rejected by a bankrupt vendor, and, at the same time, better justify booking and depreciating the IRU as an asset.

In the end, there are no guarantees that any of these measures will work but they are worth the effort. Of course, it always pays to perform a thorough credit check of the vendor beforehand, including, if possible, a review of its financials.