May 1, 2018 / 7:09 PM / a year ago

Junk bond investors brace for three default-prone firms to report earnings

NEW YORK (Reuters) - High-yield bondholders this week will closely study the earnings reports of three companies that are at risk of default: two telecommunications firms providing service to rural areas - Frontier Communications Corporation (FTR.O) and Windstream Holdings Inc (WIN.O) - and hospital operator Community Health Systems Inc (CYH.N).

A trader on the floor of the New York Stock Exchange watches the stock market drop on his screen shortly before the closing bell in New York, U.S., April 6, 2018. REUTERS/Lucas Jackson

Weak performance outlooks and swaths of debt coming due in 2019 and 2020 put all three at risk for default, according to rating agencies, investors and analysts. Junk bond investors will be looking for evidence Frontier, Windstream or Community Health are able to perform in order to justify remaining invested - or before buying new debt - as underperformance in the first quarter could limit their access to credit markets.

Frontier reports after the bell on Tuesday, Community Health on May 2 and Windstream on May 3.

The three were all rated the lowest possible score of one out of 100 on their one-year default probability, based on the Thomson Reuters StarMine Credit Risk Model. By comparison, Verizon Communications (VZ.N) scored 47 and UnitedHealth (UNH.N) scored 86.

Community Health disclosed in March that it was contemplating refinancing more than $4 billion of its debt, making it particularly reliant on the good faith of bondholders. It is currently levered at 7.9 times EBITDA, which led Moody’s Investors Service to downgrade its corporate family rating to Caa1 in March.

In addition to its high leverage ratio, “industry-wide operating headwinds will limit operational improvement despite Community’s turnaround initiatives,” wrote Peter Abdill, managing director for corporate finance at Moody’s.

Community Health did not immediately respond to a request for comment.

Windstream was downgraded by JPMorgan to underweight in January and by Moody’s to B3 from B2 in February following its fourth-quarter earnings report, which showed revenue and EBITDA declined by 5.5 percent in 2017 from the prior year. The telecom has $1 billion of debt due in both 2020 and 2021 and faces refinancing risk given negative market sentiment.

Windstream disputes that the company is at risk of default. “We significantly improved the maturity profile of our balance sheet in 2017 by pushing almost $2 billion in maturities out an average of more than two years. The company has no meaningful maturities prior to 2020, and we will continue to opportunistically improve the balance sheet over the coming quarters,” David Avery, a spokesman for Windstream, told Reuters.

Deutsche Bank had limited faith in Frontier’s efforts to reduce costs, estimating that EBITDA would decline by 5 percent to 6 percent year-over-year through 2020 as weak revenue outweighs the company’s cost reductions. “Our model does not imply any deleveraging in upcoming years, despite $250 million (more or less) in annual cash savings from the dividend suspension,” wrote Matthew Niknam, research analyst at Deutsche Bank.

Frontier did not immediately respond to a request for comment.

Reporting by Kate Duguid; Editing by Jennifer Ablan and Dan Grebler

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