Fitch: Frontier's Equity Offerings a Positive for Verizon Transaction Funding

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings believes the successful offering by Frontier Communications Corporation (Frontier; NYSE: FTR) of common and mandatory preferred equity in the total amount of $2.5 billion to $2.75 billion are supportive of its ultimate credit profile, and are a key part of its financing for the pending $10.5 billion Verizon line acquisition. Fitch anticipates reviewing the transaction and its financing in its entirety, and will maintain Frontier's 'BB' Issuer Default Rating (IDR) and long-term debt ratings on Rating Watch Negative.

As announced in February 2015, Frontier 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.

The common stock offering and mandatory convertible preferred equity offering are expected to total $750 million and $1.75 billion, respectively. The total amount raised could exceed $2.5 billion, given that the underwriters have been granted the option to purchase from Frontier up to an additional 10% of each offering.

Once the equity offerings are complete, Frontier intends to finance the remainder of the transaction primarily with debt. The company may also consider a modest level of secured debt financing. Financing plans are backed by bridge facilities.

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. With respect to the mandatory convertible preferred securities, Fitch will 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 final 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: At March 31, 2015,Frontier's gross leverage was 4.5x, which included all of the debt issued to fund the October 2014 AT&T line acquisition for approximately $2 billion but only part of the EBITDA generated by the acquisition. Based on first quarter 2015 annualized EBITDA, gross leverage approximated 4.25x. Pro forma for the completion of the Verizon transaction in 2016, Fitch estimates Frontier's gross leverage could be 4x or slightly higher, assuming the company issues approximately $2.5 billion to $2.75 billion equity to fund the transaction.

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.

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 $553 million over 2015 and 2016 can be managed with cash expected to be on the balance sheet plus FCF.

Liquidity Solid: Frontier's ample liquidity, which is derived from its cash balances and its $750 million revolving credit facility, supports the rating. At March 31, 2015, Frontier had $509 million in balance sheet cash. Fitch expects 2015 FCF to be similar to the $181 million achieved in 2014, owing to integration and acquisition costs associated with the Verizon transaction, as well as integration capital.

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. Fitch notes that the $2.5 billion to $2.75 billion anticipated raised by the offering is not materially lower than Fitch's initial assumptions.

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.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014);

--'Telecommunications - Ratings Navigator Companion' (Nov. 17, 2014).

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage [749393 - 28-MAY-2014] (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Related Research

Telecommunications: Ratings Navigator Companion [809869 - 17-NOV-2014]

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=809869

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150602006727/en/

Fitch Ratings
Primary Analyst
John Culver, CFA
Senior Director
+1-312-368-3216
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Constance McKay
Associate Director
+1-312-368-3148
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
[email protected]
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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