Fitch Ratings has affirmed the 'BB-(EXP)' Long-Term Issuer Default Rating (IDR) of
Fitch has also affirmed Frontier's
In addition, Fitch has affirmed the first lien secured term loan exit facility due 2027 at 'BB+(EXP)'/'RR1'; Frontier plans to increase the size of this exit facility from its existing
Frontier's and
Fitch expects to assign the ratings following Frontier's emergence in early 2021. The expected ratings will be reviewed for material changes prior to Fitch assigning final ratings. Material changes may include changes in the company's capital structure at emergence, any material deviations from current assumptions, and Fitch's issuance of updated criteria or criteria exposure drafts. Expected ratings, similar to any other rating, can be raised, lowered, placed on Rating Watch or withdrawn.
KEY RATING DRIVERS
Low Leverage Upon Emergence: Frontier's 'BB-(EXP)' and Stable Outlook is supported by relatively low leverage for the rating and relatively low leverage compared with other telecom operators in Fitch's
A much improved FCF position will result from a reduction in interest expense of more than
Managing Coronavirus Effects: Fitch believes the risk of the coronavirus pandemic on the operational performance of the telecom sector is low relative to other sectors. Enterprise revenues have some pressure with businesses temporarily closed with the effect on small businesses more pronounced.
This was mitigated by increased use in communication services to conduct business as travel is down materially and remote working continues. Stability in consumer revenues is supported by demand for broadband, not only for work-at-home, but remote learning and increased consumption of entertainment services, such as video and gaming.
Capital Allocation: Frontier is expected to emerge from bankruptcy in early 2021. The current holders of the senior unsecured debt will become the new owners of the company as a result of the restructuring support agreement (RSA). The capital allocation policy remains uncertain, while the company is in bankruptcy with respect to more aggressive investment plans and an articulated capital structure. Fitch believes the company and parties to the RSA are targeting a net leverage ratio of less than 3.0x based upon the anticipated level of debt at emergence.
Challenging Operating Environment: The rating incorporates a challenging operating environment for wireline operators. We expect Frontier's revenue trends to continue to be negative in the next couple of years on an organic basis. The expiration of
Fitch expects this latter effect to be mitigated by the next generation of broadband support through the
FCF and Debt: Fitch is estimating FCF will be around
Asset Sales: Frontier sold operations in
Secured Debt Notching: Frontier parent secured debt is notched up two levels from the IDR. The secured debt benefits from certain guarantees and equity pledges. The first mortgage bonds of Frontier Southwest are also notched up two levels from the IDR, given the security provided by a first lien on substantially all of its assets. For rated entities with IDRs of 'BB-' or above, Fitch does not perform a bespoke analysis of recovery upon default for each issuance. Instead, we use notching guidance whereby an issuer's secured debt can be notched upward zero to two rating levels.
Unsecured Debt Notching: For corporate entities rated 'BB-' and above, the rating assigned to an issuer's senior unsecured debt instrument assumes an average recovery available to these creditors in the event of bankruptcy. When average recovery prospects are present, IDRs and unsecured debt instrument ratings are equal, with no notching.
For subsidiary unsecured debt, Fitch notes the structural seniority to Frontier parent debt and the rating is notched up one level to 'BB(EXP)'/'RR2'. At any rating level where the bespoke approach is not used, analysts can denote contractual or structural subordination that is detrimental to the unsecured debt by rating it lower than the IDR. A bespoke style analysis determining below average recoveries could lead to a rating lower than the IDR. The 'B+(EXP)'/'RR5' assigned to Frontier Florida's unsecured debt reflects Frontier Florida as a guarantor of Frontier's secured credit facility.
Parent-Subsidiary Relationship: Fitch linked the IDRs of Frontier and its operating subsidiaries based on strong operational ties.
DERIVATION SUMMARY
Frontier has higher exposure to the more volatile residential market compared with
Cheaper alternative offerings, such as voice over internet protocol and over-the-top video services provide additional challenges. Incumbent wireline operators had modest success with bundling broadband and satellite video service offerings in response to these threats. Fitch expects Frontier to emerge from bankruptcy with lower leverage than higher-rated peers
Frontier needs to improve its competitive position in the enterprise market. In this market, Frontier is smaller than
All three companies have an advantage with national or multinational companies, given extensive footprints in the
KEY ASSUMPTIONS
Revenues decline just above 10% in 2020, largely reflecting the sale of the
Revenue declines at a slightly lower rate in 2021 and 2022, due to the partial year of the Northwest assets in 2020, and the loss of
EBITDA margin is expected to decline to the high 30% range in 2020 and 2021 from the low 40% range in 2019. The loss of
Capital spending reflects company plans of approximately
Cash taxes are nominal in 2020-2023.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Gross leverage, defined as total debt with equity credit/operating EBITDA, expected to be sustained at or below 3.0x, with FFO leverage of 3.0x, while consistently generating positive FCF margins in the mid-single-digits.
Greater certainty around capital allocation, given the new shareholder base upon emergence.
Successful execution on cost reduction plans.
Consistent gains in revenues from anticipated investments in fiber/broadband product areas.
Demonstrating stable EBITDA and FCF growth
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A weakening of operating results, including deteriorating EBITDA margins and an inability to stabilize revenue erosion in key product areas or offset EBITDA pressure through cost reductions.
Discretionary management decisions, including but not limited to, execution of M&A activity that increases gross leverage beyond 4.5x, with FFO leverage of 4.5x, in the absence of a credible deleveraging plan.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
LIQUIDITY AND DEBT STRUCTURE
Frontier has a substantial amount of liquidity at this current point-in-time with more than
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Frontier has an ESG Relevance Score of 4 for Management Strategy due operational challenges following the close of the Verizon transaction that resulted in elevated subscriber churn and weaker than expected revenue, which had a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONS
ENTITY/DEBT RATING RECOVERY PRIOR
Frontier North Inc. LT IDR BB-(EXP) Affirmed BB-(EXP)
senior unsecured
LT BB(EXP) Affirmed RR2 BB(EXP)
Frontier Florida LLC LT IDR BB-(EXP) Affirmed BB-(EXP)
senior unsecured
LT B+(EXP) Affirmed RR5 B+(EXP)
Frontier California, Inc. LT IDR BB-(EXP) Affirmed BB-(EXP)
senior unsecured
LT BB(EXP) Affirmed RR2 BB(EXP)
Frontier Communications Corporation LT IDR BB-(EXP) Affirmed BB-(EXP)
senior secured
LT BB+(EXP) Affirmed RR1 BB+(EXP)
Frontier Southwest Inc. LT IDR BB-(EXP) Affirmed BB-(EXP)
senior secured
LT BB+(EXP) Affirmed RR1 BB+(EXP)
Frontier West Virginia Inc. LT IDR BB-(EXP) Affirmed BB-(EXP)
senior unsecured
LT BB(EXP) Affirmed RR2 BB(EXP)
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
(C) 2020 Electronic News Publishing, source