Private Investors Keep Tabs on Pending Forbearance Petitions

Forbearance might be an old topic, but it’s still a hot one with three dockets percolating at the FCC. One even is due for a decision by July 26. The usual suspects continue to weigh in. Yet there’s one set of perhaps-overlooked voices that stands out: private telecom investors. This isn’t the first time equity firms have participated in forbearance proceedings; but as the slowing economy blocks the availability of capital and as a telecom monopoly re-forms, their input has become more important than ever. Equity firms have pumped billions of dollars into competitive telecom infrastructure, and for them, and their portfolio companies, forbearance poses a huge threat. And they’re very concerned about a pending Verizon Communications Inc. request.

“Forbearance is really the critical issue because if you don’t have access to the loops on a cost-effective basis, then you can’t make the investment work on the competitive side,” said Gillis Cashman, a general partner with Boston-based M/C Venture Partners.

M/C Venture Partners is one of the private firms weighing in on two of the three forbearance matters pending before the FCC. M/C Venture Partners used to own McLeodUSA Inc., which is now owned by PAETEC; its current investments include Airband, Cavalier Telephone, MetroPCS and NuVox.

It’s imperative for the FCC to consider private firms’ perspectives, said Andy Lipman, a Bingham McCutchen lawyer representing M/C Venture Partners and Columbia Capital.

“The issue isn’t just a back-and-forth between incumbents and competitors, and I think that the financial sponsors’ pleading underscores the competitive pleading – that is, that the forbearance threat could materially impact the availability of capital for broadband deployment by competitive carriers. And that’s especially the case in today’s financial markets where capital is becoming increasingly scarce,” Lipman said.

Private equity firms know market conditions better than carriers do, Lipman said, and they know what’s favorable to capital spending and what isn’t. If the FCC grants forbearance to Qwest Communications International Inc. in Denver, Phoenix, Minneapolis/St. Paul and Seattle, it’ll be déjà vu all over again.

Recall that, in 2005, the FCC granted Qwest forbearance in Omaha, Neb. The agency agreed that Qwest faces extensive competition from VoIP, wholesale, cable and other wireline operators. Since then, McLeodUSA has said it will pull out of the market if forbearance continues. And Integra Telecom and Eschelon – now one company – both reversed plans to build in Omaha “because of the threat of forbearance and the fact that forbearance, at least as exercised by Qwest, makes the market unattractive to competitive entrants,” Lipman said.