Financing for cable deal goes through; Salisbury to pay 5.1 percent rate on $35 million

Published 12:00 am Wednesday, December 2, 2009

By Mark Wineka
Salisbury secured almost $35 million in financing Thursday ó the biggest one-time debt issue in its history ó for a new fiber-optic cable utility.
“Anytime you make a decision like this, there is a risk, but we’ve studied it for so long,” Mayor Susan Kluttz said, describing the model put together and the discussions officials had with business leaders.
“I really feel like it’s going to make a big difference for our future.”
City Manager David Treme said the $30 million-plus cable enterprise will likely be rolled out in 2010, while the coming year is used to start building a network, headquarters and new customer service center.
Salisbury received an average coupon rate of 5.108 percent on a total principal debt amount of $34.96 million. Earlier this week, Salisbury City Council had approved proceeding with a sale of certificates of participation if the interest rate on the debt were 5.85 percent or less.
The business model for the cable utility said it would work with an interest rate of 6 percent or less.
Treme said he was “very happy” with the interest rate. The last piece of the almost $35 million in debt will be paid off in 20 years.
Management Services Director John Sofley agreed it was a good rate, “especially in this time when financial markets are in such disarray.”
“Times have been very tight,” he said.
BB&T Capital Markets is the primary underwriter. It began marketing the debt at 9 a.m. Thursday. By the time it made its offer to the city to purchase the total debt it already had sold $10 million, Sofley said.
The certificates of participation were sold insured, meaning the city could take advantage of a Triple-A credit rating and achieve a lower interest rate.
As long as the guarantor’s credit rating doesn’t change between now and the Dec. 2 closing date, the city will receive funds in December at the 5.108 percent rate. If the credit rating were lowered, the deal would be off, and the city would reschedule a sell date.
The city’s business model has the cable utility making a profit within three to four years and expects at least a 28 percent market penetration.
“The economic times are so tough right now, and we know people have questions,” Kluttz said. “But if we get into this cable business, we will be able to offer a product at a lower cost. We see this as an advantage to our citizens, plus it gives them accountability to us if they have a complaint.”
City Council members have touted their “fiber to the home” initiative on several other fronts. Foremost, they say, it will take fiber-optic cable ó whose bandwith offers much greater capacity and speed ó to homes and businesses.
They fear that companies such as Time Warner Cable and AT&T will take years to replace the copper wiring they now have in place to most of their customers. When those companies decide to take fiber to the home, city officials argue, they’ll do it first in larger cities where it makes the most economic sense.
Places such as Salisbury would come much later, they say.
The Salisbury officials also speak of a “local determination” for their cable enterprise, which would be more accountable to its customers.
Kluttz said Salisbury is large enough to afford getting into the business and small enough to run it successfully.
“We have an opportunity to do something most cities can’t do,”‘ she said. “… We have to compete with other cities and have to offer something to be unique, especially with competition from Kannapolis and the biotech center.”
The fiber-optic capabilities of the new cable system should attract new business and create a big advantage for businesses already here, Kluttz said.
“We believe the investment in this technology for our city will provide some tangible benefit in terms of creating jobs,” Treme said. It also will help in a transformation to a knowledge-based economy and in support of the region as a biotech center, he added.
“I think we can get it done and do it right and provide outstanding customer service,” Treme said.
Salisbury plans to build an operations facility and new customer service center on 4.5 acres of land off South Martin Luther King Jr. Avenue across from Abundant Living Adult Day Services. It will become the place where residents can pay their water-sewer bills, too.
The city already has negotiated a pole attachment agreement with Duke Energy for use of its poles in many locations to string the fiber-optic cable.
The $35 million bond issue also will pay for some other capital projects.