Telecom Financing Outlook

1
Telecom Financing Outlook

• Ellen Classen
• Vice President - Marketing
• Rural Telephone Finance Cooperative

2
RTFC

• Privately funded, not-for-profit lender to rural
  ILECs and their affiliates.
• 3 Billion loan portfolio.
• Affiliated with CFC, primary non-govt lender to
  rural electric co-ops.
• Acquisitions, infrastructure largest portion of
  RTFC portfolio.

3
Financial Markets Hate Uncertainty

• Telecom uncertainty due to
• Flat access line growth.
• Decrease in access minutes wireless, email.
• IP based services may be exempt from access and
  USF obligations.
• Changes to ICC - bill keep?
• Potential changes to USF.
• Impact of VOIP.
• State Regulatory difficulties/uncertainties.

4
Positive Signs

• Recent activity on key issues
• 2/05 NPRM on ICC reform did not include FCC staff
  proposal advocating bill and keep.
• Kevin Martin for Michael Powell.
• S.241 to permanently exempt USF from ADA
• 1/05 FCC relaxed safety valve rules mitigating
  parent trap effect on acquired exchanges.
• 2/05 RO tightening the ETC designation.
• 3/05 ARIC and EPG join forces.

5
Positive Signs

• RTFC take on these events
• Fears over retulatory-based revenue streams for
  RLECS, while understandable, are likely
  overblown.
• Any long-term solutions to USF and ICC will
  likely be revenue-neutral to the RLEC.
• RLECs own the network and reputation for quality
  advanced services.
• RLECs will leverage these assets to diversify.

6
Senior Debt Outlook

• Relatively low debt multiples
• 4 to 4 ½ times EBITDA
• Not enough good news to make non-government
  lenders more aggressive.
• RUS has lots of funds to lend for core purposes
  broadband.
• Expect senior non-govt. lenders to seek credit
  support on deals to affiliates.

7
Recent Financing Activity

• Income deposit securities tanked US market not
  receptive.
• Several RLECs successfully completed IPOs.
• Iowa Telecom
• Valor
• Fairpoint
• Madison River to go soon
• Resulted in significant debt reductions.

8
RLEC Equity Market Outlook

• Public and private equity markets now look at
  RLEC sector as better than most telecom
  alternatives.
• Vehicles for dividends rather than growth play.
• Financial markets and telecom trends have driven
  this.
• Poor returns from other instruments.
• No RLEC growth story to tell, but historic
  returns are viewed positively.

9
Access to Capital

• Not enough good news to make non-government
  lenders more aggressive but money is available
  for core projects,
• RUS has funds to lend for core purposes and
  broadband,
• RTB to be liquidated.

10
RTB A Brief History

• Created by government in 1971, to eventually be
  privatized.
• Class A stock government investment, 2 return.
• Class B stock RTB Borrowers investment, paid
  stock dividends.
• Class C stock open to associations and Class B
  conversions, paid cash dividends.
• Privatization began in late 1990s.

11
RTB Dissolution

• All Government agencies have bought off on it.
• Final vote will take place at RTB Board August
  meeting.
• Notice will follow to all borrowers.
• Dissolution should be complete by June 2006.
• Distributions to shareholders to follow soon
  after.
• RUS will take over remaining accounts.
• Key is FY 2006 AG Appropriations.

12
RTB Dissolution

• Effects throughout the Telecom Industry and
  RTFCs Take
• Leaves the industry with two non-government
  lenders.
• Tells us that the industry is satisfied with
  current lenders as it never really engaged in the
  privatization process.
• Infusion of approx. 1.1 billion in RLEC
  industry.
• Opportunity for debt restructuring.
• Opportunity for companies to begin new projects.

13
Overall Outlook

• Financial institutions still somewhat cautious.
• Deals involving traditional services still most
  attractive to lenders.
• Pending legislation still looming out there.
• Money available through government sources for
  broadband projects.
• RTB funds will enable debt restructuring and/or
  new projects for many RLECs.

14
Where Do You Go From Here?

• Evolve network to offer triple play.
• Ultimately more of your revenue will have to come
  from your end user/customers.
• Exit money losing non-core businesses.
• Get your balance sheet and income statement in
  order.
• Talk to your banker early and often.

15
Summary

• Fundamental changes to RLEC revenue streams seem
  imminent.
• Even worst-case doesnt look fatal.
• RLECs have significant assets to leverage in
  order to weather the storm.
• Debt financing for sound projects is available,
  but at relatively low leverage ratios.