March 28, 2013 / 2:30 PM / in 5 years

Fitch Rates Frontier Communications' Proposed Offering 'BB+'; Outlook Negative

(The following statement was released by the rating agency) CHICAGO, March 28 (Fitch) Fitch Ratings has assigned a 'BB+' rating to Frontier Communications Corporation's (Frontier) (NYSE: FTR) offering of $750 million of 7 5/8% senior unsecured debt due in 2024. Net proceeds from the offering, combined with existing cash on the balance sheet, are expected to be used to repay existing debt. Frontier's Issuer Default Rating (IDR) is 'BB+' and the Rating Outlook is Negative. KEY RATING DRIVERS Fitch believes Frontier will be challenged to return revenues to growth over the next two to three years, which is the principal driver of the Negative Outlook. Business services and data services revenues declined modestly in 2012; historically, local exchange carriers have been able to grow these revenues and mitigate the erosion of voice revenues on overall financial performance. The company has efforts underway to spur business and data services revenue, but uncertainty remains regarding the rate at which management can improve operations. Revenues have also been affected by the net effect of reforms to intercarrier compensation. Finally, cost controls in 2013 are expected to provide some offset to the continued revenue erosion, but savings (a net $100 million) are smaller than the gains recognized through 2012 from acquisition synergies (which totaled approximately $653 million over the 2010-2012 period). Modest Net Leverage Improvement Expected: In 2013, improvements in Frontier's net leverage are likely to be modest. Other than a $503 million repayment of maturing debt in January 2013, further debt reductions arising from maturing debt are not significant. Net leverage in 2013 is expected to be flat with year-end 2012 at 3.2x, and decline to 3.1x in 2014. Ongoing Competitive Pressures: Frontier's operations are showing a slow and relatively stable rate of decline due to competitive pressures and technological substitution; the lack of material employment growth has hurt the recovery of business services revenue. There is also sustained pressure from competition on business revenues, particularly in the small business area. This in turn has led to salesforce initiatives and expansion of distribution channels (with an increase in costs). A key issue for Frontier in 2013 will be to attract customers; churn levels of existing residential customers have declined (a positive) and revenues per residential customer have increased. With the completion of the Verizon line integration, the company states that it has realized $653 million of annual operating synergies, much higher than the $500 million expected when the transaction was announced. These synergies have enabled the company to sustain its relatively strong margins - around 47% over 2011 and 2012 - in the face of strong competition. 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 Dec. 31, 2012, Frontier had $1.327 billion in cash; pro forma for a Jan. 15, 2013 debt repayment, cash balances were still high at $824 million. Free cash flow (FCF) was approximately $351 million in 2012, relatively strong considering capital spending remained elevated due to continued expansion of broadband availability. Not included in FCF was $102 million of cash that was released from escrow accounts as broadband buildout milestones were reached (escrow accounts were required by regulators for regulatory approval). Fitch expects FCF (net cash provided by operating activities less capital spending and dividends) to be in the $330 million to $350 million range in 2013. Although lower EBITDA, higher interest expense and higher cash taxes will reduce FCF, the effect is nearly offset by lower capital spending and the elimination of integration and acquisition related expenses (in 2012, $82 million of operating expenses and $54 million of capital expenses) following the completion of the Verizon line integration. 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. In 2013, there will be no spending on integration activities, as integration was completed 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 a range of $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 Jan. 1, 2014; Fitch expects the company to renew the existing facility or put in place a new facility during 2013. 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. The company has a $40 million unsecured letter of credit facility maturing Sept. 20, 2013. The facility has no financial ratio covenants, and other negative covenants are similar to those in its existing facility. A letter of credit was issued to the West Virginia PSC to guarantee capital expenditure commitments in the state with respect to the acquisition of the Verizon lines. Frontier has approximately $561 million of debt due in 2013 (of which $503 million has already been repaid), $258 million due in 2014, and $733 million due in 2015. RATING SENSITIVITIES Considerations for a Downgrade: --If the company's net leverage is 3.3x or above at year-end 2013, and/or if the company does not succeed in generating positive revenue growth in business and data services, the rating would be downgraded. Considerations for a Stable Rating Outlook: --Fitch would expect to see net leverage on a sustainable downward path, indicating progress in stabilizing EBITDA and reducing debt. In addition, the company's business services and data service revenues must demonstrate growth. 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'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Rating Telecom Companies' (Aug. 9, 2012). Applicable Criteria and Related Research Corporate Rating Methodology here Rating Telecom Companies 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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