December 18, 2013 / 5:30 PM / 4 years ago

Fitch Downgrades Frontier Communications' IDR to 'BB'; Outlook Revised to Stable

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(The following statement was released by the rating agency) CHICAGO, December 18 (Fitch) Fitch Ratings has downgraded the Issuer Default Rating (IDR) and long-term debt ratings of Frontier Communications Corporation (Frontier) (NYSE: FTR) as follows: --IDR to 'BB' from 'BB+'; --Senior unsecured $750 million revolving credit facility due 2016 to 'BB' from 'BB+'; --Senior unsecured notes and debentures to 'BB' from 'BB+'. The Rating Outlook is revised to Stable from Negative. In addition, Fitch has revised the ratings of other Frontier subsidiaries as listed at the end of this release. KEY RATING DRIVERS The downgrade follows a review of Frontier's rating following the announcement of the definitive agreement to acquire certain wireline assets in the state of Connecticut from AT&T, Inc. for $2 billion in cash. 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. However, the transaction will be mostly funded by increased debt, leading to an approximate 0.4x increase in Frontier's net leverage. In Fitch's view, Frontier's net leverage was weak for the previous 'BB+' rating category, and that 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. The expected range is more reflective of a 'BB' rating. Ongoing Competitive Pressures: Through three quarters of 2013, business and residential customer revenue declines have moderated sequentially and are approaching stability, although potential headwinds from competitive pressures and technological substitution remain in place. Revenues have also been affected by the net effect of reforms to intercarrier compensation. A key issue for Frontier over time will be to maintain and attract customers. Manageable Maturities: Excluding the transaction financing, Frontier is not expected to need to access the capital markets to refinance maturing debt through at least 2016. Existing maturities of approximately $863 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 Sept. 30, 2013, Frontier had $661 million in cash. Fitch expects FCF to be in the $275 million to $325 million range in 2013. Although lower EBITDA, higher interest expense and higher cash taxes will reduce FCF relative to 2012, the effect is nearly offset by lower capital spending and the elimination of integration- and acquisition-related expenses. Frontier's expectations for 2013 capital spending range from $625 million to $675 million for its normal construction program plus the tail end of broadband expansion spending, with the mid-point down from the $748 million spent in 2012. The company has been spending capital on fiber-to-the-cell-tower projects, but expects this spending to wind down in 2013. In 2013, cash taxes are expected to rise to $125 million to $150 million, up from a nominal $5 million in 2012. Credit Facility and Debt Maturities: The $750 million senior unsecured credit facility is in place until November 2016. 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 $258 million due in 2014, $259 million due in 2015, and $345 million due in 2016. RATING SENSITIVITIES 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 take place. Fitch has downgraded the following ratings and revised the Outlook to Stable from Negative: Frontier North Inc. --IDR to 'BB' from 'BB+'; --$200 million unsecured notes due 2028 to 'BB+' from 'BBB-'. Frontier West Virginia --IDR to 'BB' from 'BB+'; --$50 million private placement notes due 2029 to 'BB+' from 'BBB-'. Contact: Primary Analyst John Culver, CFA Senior Director +1-312-368-3216 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst David Peterson Senior Director +1-312-368-3177 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 5, 2013); --'Rating Telecom Companies' (Aug. 9, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Rating Telecom Companies here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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