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Fitch Places Frontier Communications' 'BB' IDR on Rating Watch Negative
February 9, 2015 / 8:51 PM / 3 years ago

Fitch Places Frontier Communications' 'BB' IDR on Rating Watch Negative

(The following statement was released by the rating agency) CHICAGO, February 09 (Fitch) Fitch Ratings has placed the Issuer Default Rating (IDR) and long-term debt ratings of Frontier Communications Corporation (Frontier; NYSE: FTR) on Rating Watch Negative as follows: --IDR at 'BB'; --Senior unsecured $750 million revolving credit facility due 2018 at 'BB'; --Senior unsecured notes and debentures at 'BB'. In addition, Fitch has placed the ratings of other Frontier subsidiaries on Rating Watch Negative as listed at the end of this release. The Negative Watch arises from Frontier's plans to acquire certain wireline operations in California, Texas and Florida from Verizon Communications Inc. for approximately $10.5 billion, including $600 million of assumed debt. The transaction is expected to close in the first half of 2016, after all necessary regulatory approvals are obtained. Frontier intends to finance the transaction primarily with debt and equity, with the equity consideration potentially consisting of common stock and equity-linked securities. The company may also consider a modest level of secured debt financing. Financing plans are backed by an 18-month bridge facility. In reviewing the transaction, Fitch will focus on the financing of the transaction, a review of potential synergies, and the outcome of the regulatory review process, among other factors. In evaluating the proposed financing of the transaction, Fitch will review the potential for secured debt in the capital structure, as well as Frontier's plans for equity financing. The company has indicated equity financing could approximate $3 billion, and that the Verizon acquisition will be relatively neutral to its leverage. With respect to the equity-linked securities, Fitch would apply its criteria 'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis', which could lead to less than 100% equity credit depending on the terms of the securities. Fitch anticipates resolving the Negative Watch around the time of the closing of the transaction, with an earlier resolution a possibility upon the conclusion of its anticipated equity offering. KEY RATING DRIVERS Leverage Increased in 2014: At Sept. 30, 2014, Frontier's gross leverage was 4.5x, which included debt issued to fund the October 2014 close of the AT&T line acquisition for approximately $2 billion. Net leverage excluding transaction financing was 3.8x. Acquisitions Improve Scale: Fitch believes the acquisition of the Connecticut operations and the proposed acquisition of the Verizon properties will increase the scale of Frontier, and lead to improved free cash flow (FCF, defined as net cash provided by operating activities less capital spending and dividends). In Fitch's view, the two acquisitions will not require material additional capital spending given past network upgrades by AT&T and Verizon. Revenue Pressures Slowly Abating: Through the first nine months of 2014, business and residential customer revenue declines have moderated and are approaching stability, although potential headwinds from competitive pressures and the economy remain in place. Manageable Maturities: Excluding the Verizon transaction financing, Frontier is not expected to need to access the capital markets to refinance maturing debt through at least 2016. Existing principal repayments of approximately $611 million over 2015 and 2016 can be managed with cash expected to be on the balance sheet plus FCF. Liquidity Solid: Supporting the rating is Frontier's ample liquidity, which is derived from its cash balances and its $750 million revolving credit facility. At Sept. 30, 2014, Frontier had $809 million in balance sheet cash. Credit Facility and Debt Maturities: The $750 million senior unsecured credit facility is in place until May 2018. The facility is available for general corporate purposes but may not be used to fund dividend payments. The main financial covenant in the revolving credit facility requires the maintenance of a net debt-to-EBITDA level of 4.5x or less during the entire period. Net debt is defined as total debt less cash exceeding $50 million. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Frontier's revenues on a stand-alone basis are expected to decline in the low single digits pro forma for the October 2014 AT&T transaction; --2015 EBITDA margins are in the low to mid 40 percent range --Capex is expected to be in the range of $750 million to $800 million in 2015; --Frontier issues approximately $3 billion in equity to fund the Verizon wireline operations, out of the total transaction value of approximately $10.5 billion. RATING SENSITIVITIES The rating could be affirmed at the current level if in Fitch's view Frontier will be able to sustain post-transaction net leverage below 4x. The rating could be downgraded if net leverage is expected to be above 4x due to a number of factors, primarily a smaller than expected equity component in the Verizon transaction financing, lower synergy realization or assumptions, and competitive pressures on EBITDA. Fitch has also placed the following ratings on Negative Rating Watch: Frontier North Inc. --IDR at 'BB'; --$200 million unsecured notes due 2028 at 'BB+'. Frontier West Virginia --IDR at 'BB'; --$50 million private placement notes due 2029 at 'BB+'. Contact: Primary Analyst John Culver, CFA Senior Director +1-312-368-3216 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst David Peterson Senior Director +1-312-368-3177 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email:; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available at ''. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (May 28, 2014); --'Telecommunications - Rating Navigator Companion' (Nov. 17, 2014). Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Telecommunications: Ratings Navigator Companihere Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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