|[September 03, 2014]
Fitch Rates Frontier Communications' Proposed $1.55B Note Offering 'BB'; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has assigned a 'BB' rating to Frontier Communications
Corporation's (Frontier) (NYSE: FTR) proposed senior unsecured note
offering of $775 million due 2021 and $775 million due 2024. Frontier's
Issuer Default Rating (IDR) is 'BB' and the Rating Outlook is Stable.
Proceeds from the offering are expected to be used to fund Frontier's
acquisition of wireline assets in the state of Connecticut from AT&T (News - Alert),
Inc. The transaction is expected to close in the fourth quarter 2014,
and until that time the net proceeds will be placed in escrow. Should
the transaction not be completed by Aug. 17, 2015, the notes will be
redeemed at par, plus interest.
KEY RATING DRIVERS
AT&T Line Acquisition: Frontier has agreed to acquire certain wireline
assets in the state of Connecticut from AT&T for $2 billion in cash.
Debt mostly funds the transaction, and will lead to an approximate 0.4x
increase in Frontier's net leverage. Following the acquisition,
Frontier's net leverage is expected to be in the range of 3.7x to 3.8x
and will remain elevated over the next couple of years.
Acquisition Improves Scale: Fitch believes the positive aspects of the
transaction include the increased scale of Frontier on a
post-transaction basis, including improved free cash flow (FCF, defined
as net cash provided by operating activities less capital spending and
dividends). The assets being acquired will not require material
additional capital spending given past network upgrades by AT&T with
respect to its U-Verse platform. A moderate amount of addition capital
spending will be directed to the upgrade of rural broadband speeds.
Revenue Pressures Slowly Abating: During 2013 and through the first half
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 this transaction-related 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 $641 million over 2014-2016 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 June 30, 2014, Frontier had $802 million in balance
sheet cash. Fitch expects 2014 FCF to be under the $461 million
generated in 2013 as a result of lower EBITDA, higher iterest expense
and higher cash taxes.
Frontier's expectations for 2014 capital spending-- excluding any
spending related to the acquisition --range from $575 million to $625
million, with the mid-point down from the $635 million spent in 2013.
Capital spending on fiber-to-the-cell-tower projects will decline in
2014. In 2014, cash taxes are expected to rise to $130 million to $160
million, up from $94 million in 2014.
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.
Frontier has approximately $30 million of scheduled principal repayments
due in the remainder of 2014, $263 million due in 2015, and $348 million
due in 2016.
Considerations for a Positive Rating Action:
--Given Fitch's leverage expectations over the next two to three years,
a positive action is not anticipated.
Considerations for a Negative Rating Action:
--If net leverage equals or exceeds 4.0x, a Negative rating action could
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Rating Telecom Companies - Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
Rating Telecom Companies
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