Thursday, January 23, 2020

"Fitch Downgrades Frontier Communications to 'CC'"

Some highlights from the Fitch ratings downgrade on Frontier Communications (FTR) today:

  • Frontier's rating incorporates a challenging operating environment for wireline operators. Fitch expects Frontier to report negative revenue trends in 2019 (results have not yet been released), with the decline slightly less than the nearly 6% decline in 2018, and to show a modest improvement in EBITDA margins.
  • [E]xpectations for 2020 were lowered, as Frontier has run into some challenges improving revenue and customer trends...
  • Frontier's going concern (GC) EBITDA estimate reflects Fitch's view of a sustainable, post-reorganization EBITDA level. The GC EBITDA incorporated in the analysis is well below LTM EBITDA for Sept. 30, 2019 to reflect the industry's intense competitive dynamics, resulting in customer losses and pricing pressures stressing profitability. In addition, the analysis excludes EBITDA from the Northwest operations, which are expected to be sold in 2020. In sum, the GC EBITDA is approximately 20% lower than LTM actual results. 
  • An enterprise value (EV) multiple of 4.8x is used to calculate a post-reorganization valuation. [...] The slightly lower recovery multiple for Frontier takes into account its weaker competitive position in the industry and the company's exposure to legacy assets. 
  • The waterfall analysis results in an 'RR1' Recovery Rating for the secured debt, including the first-lien debt and RCF, and the second-lien senior secured notes. The waterfall also indicates an 'RR4' recovery for senior unsecured notes.
A 20% drop in EBITDA is very bearish indeed! If you look at my recovery table, a 20% lower EBITDA and a 4.8x enterprise value multiple would result in a mid 40s recovery for unsecured debt - which is where the debt is trading.


Ponch73 said...

Does Fitch have a good track record when it comes to ratings downgrades or is this downgrade simply an after-the-fact justification (taking a page from S&P's and Moody's playbooks)?

Also, what do you think about the news today that Frontier will benefit from the FCC's Connect America Fund being extended through next year? That's likely another $300 mil per year in found money for FTR. Coincidentally, it's the same order of magnitude as the loan payment due in March.

10:51 ET - Federal Communications Commission officials' new rural internet program is a "mixed bag" for incumbents like CenturyLink and Frontier Communications, according to research shop MoffettNathanson. Long-tern, the FCC's new Rural Digital Opportunity Fund will introduce more competitive construction grants, potentially threatening a profitable subsidized business. But the existing Connect America Fund that RDOF replaces won't wind down until year-end 2021, a year later than originally planned. The extra year, worth $500M to CenturyLink, "does not entail any additional build requirements," and is "basically free money," the researcher writes. MoffettNathanson tweaks its CenturyLink cash-flow estimates accordingly but warns the spigot could slow in future years.

eahilf said...

As you may know, Paul Singer was able to force Argentina into full repayment by suing them in court -- so apparently 'recovery ratings' don't apply to sovereign debt -- are you at all familiar with the different legal frameworks vis-a-vis recovery of corporate vs sovereign debt? --> link

eahilf said...



A group of creditors including Elliott Management Corp. and Franklin Resources Inc. held nearly 50% of the company’s bonds and organized with law firm Akin Gump Strauss Hauer & Feld LLP and investment bank Ducera Partners LLC, Bloomberg previously reported.

Elliott Management is Singer's company.

Frontier has been in talks with advisers about possible solutions to its $17.5 billion debt load, which has become a heavy burden as people stop using land lines.

That's a lot of debt.