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Credit analysts: Frontier likely to restructure debt soon

Frontier Communications Corp. has taken multiple steps to trim its balance sheet in recent years, suspending its dividend in 2018 and selling assets in 2019. But credit analysts believe 2020 is the year Frontier will finally restructure its debt.

Frontier, a provider of wireline phone and internet services, serves millions of customers across the country and still generates steady cash from its operations. But it also faces a heavy debt load — with more than $17.30 billion of total debt as of the end of the third quarter of 2019. As such, credit analysts say it is highly likely the company will initiate a distressed debt exchange or file for bankruptcy in the first half of the year. Many are expecting an announcement no later than mid-March.

"It is clear that they will file for a prepackaged bankruptcy within the next couple of weeks," Independent Credit Research founder Stan Manoukian said in an interview.

Manoukian noted that Frontier has more than $300 million in interest payments due in mid-March, and he does not expect those payments to be made.

Manoukian is not alone in this belief.

"Frontier, at the end of the day, is probably going to end up filing [for bankruptcy] in March," S&P Global Ratings credit analyst Allyn Arden said in an interview.

In an emailed statement, Frontier itself said the telecommunications company is "evaluating its capital structure with an eye to reducing debt and interest expense so as to be able to better serve our customers."

Fitch Ratings Senior Director John Culver said there is a possibility that Frontier could delay filing because it still generates enough cash to fund its interest payments. But he noted that does not solve Frontier's long-term problem, which includes a $2.70 billion "maturity wall" looming in 2022.

According to S&P Global Market Intelligence data, Frontier has $226.7 million in senior debt set to mature in 2020 and $408.99 million in senior debt set to mature in 2021. In 2022, however, the company has $2.70 billion in senior debt that will come due or need to be refinanced — a feat that would be difficult given the company's current debt ratings.

Fitch downgraded Frontier's issuer default rating to CC from CCC at the end of January, noting that "a default of some kind appears probable." S&P Global Ratings lowered the rating on Frontier twice in 2019, ultimately to CCC-. CCC bonds are junk bonds and are well below investment-grade status. Banks are not allowed to invest in those bonds.

"I don't know what's going to happen in March, but the interest payments are pretty substantial," Culver said. "I think people are looking at it as a trigger point."

For Manoukian, the question is not when Frontier will file but rather how much of the company's unsecured debt will be canceled out and swapped for equity.

"Bondholders may consider reestablishing a small portion of unsecured debt to get more certain returns," Manoukian said, explaining that some bondholders may favor this option due to concerns around the health and longevity of Frontier's stock after it emerges from bankruptcy.

But Manoukian believes those concerns are misplaced, as he thinks Frontier will quickly reinstate its dividend after restructuring, boosting demand for the stock.

"This equity will be a big deal," Manoukian said, noting that post-bankruptcy Frontier shares would gradually migrate from the hands of former distressed debt holders to the hands of mutual funds specializing in dividend-paying stocks.

"There is a great demand for high dividend yield stocks," he said.

Frontier suspended its regular quarterly dividend in February 2018 to accelerate debt reduction. Prior to that, however, it had been known as a high-yield stock. As of the end of 2017, the company had a fourth-quarter dividend yield of 35.5%. The dividend yield is calculated as the regular cash dividends paid on the common stock during the period as a percent of the common stock price.

Another question is whether Frontier will up its capital expenditures to replace its copper wireline networks with fiber. Copper is used to deliver wireline phone and DSL internet service. DSL generally offers download speeds between 5 Mbps and 35 Mbps, while fiber supports gigabit internet speeds and can also be used to support the delivery of next-generation 5G services.

Arden at S&P Global Ratings noted that Frontier, thus far, has been unable to invest heavily in upgrading its network due to its debt load.

"That's the problem that most of these wireline companies have — the legacy business is all copper based and they have to overbuild with fiber. But the reality is that the leverage is too high and it's hard to invest when your leverage is 4x or 5x. A typical wireline company should probably have leverage no higher than 2x," he said.

As of the third quarter of 2019, Frontier had total debt/adjusted EBITDA, or a leverage ratio, of almost 5.4x.

However, after restructuring, Manoukian said Frontier should have enough cash to both invest in its networks and support a strong dividend.

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