Moody's Downgrades Frontier Communications (FTR) to 'B1'; Outlook Lowered to Negative

November 7, 2016 11:31 AM EST

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Moody's Investors Service, has downgraded the corporate family rating of Frontier Communications Corp. (Nasdaq: FTR) to B1 from Ba3 and changed the outlook to negative based on the company's persistently weak fundamentals. The downgrade follows disappointing 3Q results, particularly within its recently acquired California, Texas and Florida (CTF) markets. The CTF markets experienced sharp subscriber losses for the second consecutive quarter and an 8% sequential decline in quarterly EBITDA. Moody's has also downgraded Frontier's probability of default rating (PDR) to B1-PD from Ba3-PD, its unsecured rating to B1 from Ba3 and its secured rating to Ba3 from Ba2. Frontier's speculative grade liquidity (SGL) rating has been downgraded to SGL-2 from SGL-1 reflecting potential pressure on its covenants from declining EBITDA.

Frontier's prior Ba3 rating was prospective and incorporated Moody's expectation of improved leverage and cash flow as the company achieved its planned merger synergies. The prior rating was also predicated on Frontier reducing debt with excess cash flow. These views have now changed and Moody's expects continued revenue, EBITDA and cash flow weakness.

Despite a higher synergy estimate, now estimated to be approximately $1.4 billion, Moody's believes that leverage will remain above Frontier's limit of 4.25x (Moody's adjusted) for its prior Ba3 rating for an extended period. Moody's estimates Frontier's leverage will be approximately 4.5x (Moody's adjusted) at year end 2016. Further, full realization of the company's costs savings initiatives could take up to three years. As we have signaled prior, Frontier's narrow equity cushion suggests the company has low leverage tolerance, which limits the timeframe over which Frontier's credit metrics can exceed Moody's targets.

The negative outlook reflects the risk that Frontier may not be able to reverse the unfavorable operating trends among its CTF markets and that EBITDA could continue to decline.

Ratings Rationale

Frontier's B1 CFR reflects its large scale of operations, its predictable cash flows and high margins. These factors are offset by an aggressive financial policy that includes a high dividend payout and frequent debt-financed acquisitions, declining revenues within its legacy business and acquired markets and the risk that the company may not have the discipline to continue to adequately invest in network modernization.

Moody's believes Frontier will maintain good liquidity over the next twelve months with $331 million of cash on hand at 9/30/2016 and an undrawn $750 million revolver. Due to declining EBITDA, covenant leverage may approach its 4.5x net leverage limit over the next 12-18 months, which, if it occurs at a faster rate than Moody's currently anticipates, could result in a loss of borrowing ability under the revolver. Moody's expects the company will maintain a modest cushion on this leverage covenant over the next few quarters. Frontier has no additional debt due in 2016 and around $500 million due in 2017. We expect Frontier to have the capacity to address these maturities with a combination of cash on hand coupled with revolver capacity. Overall, Frontier has a favorable maturity profile with modest annual maturities until 2020.

Frontier's common dividend consumes approximately $500 million in cash annually. A dividend cut would improve Frontier's liquidity and its ability to repay debt. Moody's believes that a dividend cut represents an opportunity for Frontier to offset its operational weakness, reduce debt and maintain a strong liquidity position in advance of the large annual maturities that begin in 2020.

Moody's could lower Frontier's ratings if leverage is sustained above 4.75x (Moody's adjusted) or if free cash flow turns negative, on a sustained basis. Also, the ratings could be lowered if the company's liquidity deteriorates, if the company engages in shareholder friendly activities or if capital spending is reduced below the level required to sustain the company's market position. Given the company's weak fundamentals and the negative outlook, a ratings upgrade is very unlikely at this point. Moody's could stabilize Frontier's outlook if the company achieves stability among its customer base that can be sustained over several quarters and maintains or improves its liquidity.

Downgrades:

..Issuer: Frontier Communications Corporation

.... Probability of Default Rating, Downgraded to B1-PD from Ba3-PD

.... Speculative Grade Liquidity Rating, Downgraded to SGL-2 from SGL-1

.... Corporate Family Rating, Downgraded to B1 from Ba3

....Senior Secured Bank Credit Facility, Downgraded to Ba3 (LGD3) from Ba2 (LGD3)

....Senior Unsecured Regular Bond/Debenture, Downgraded to B1 (LGD4) from Ba3 (LGD4)

Outlook Actions:

..Issuer: Frontier Communications Corporation

....Outlook, Changed To Negative From Stable

..Issuer: New Communications Holdings Inc. (Assumed by Frontier Communications Corporation)

....Senior Unsecured Regular Bond/Debenture, Downgraded to B1 (LGD4) from Ba3 (LGD4)

The principal methodology used in these ratings was "Global Telecommunications Industry" published in December 2010. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.



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