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Fitch Upgrades Frontier Communications' IDR to 'BB+'; Assigns Stable Outlook

^{Published on 2010-06-25 08:16:26 - Market Wire}
 

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has upgraded Frontier Communications Corporation's (Frontier) (NYSE: FTR) Issuer Default Rating (IDR) to 'BB+' from 'BB' in anticipation of the July 1, 2010 closing of the acquisition of certain access lines from Verizon Communications, Inc. (Verizon) (NYSE: VZ). To complete the transaction, New Communications Holdings Inc. (Spinco), a subsidiary of Verizon Communications Inc. (Verizon) (NYSE: VZ), will merge with and into Frontier.

The following ratings have been upgraded:

Frontier Communications Corporation:

--IDR to 'BB+' from 'BB';

--Senior unsecured $250 million credit facility due May 18, 2012 to 'BB+' from 'BB';

--Senior unsecured $750 million credit facility due Jan. 1, 2014 to 'BB+' from 'BB';

--Senior unsecured $145.1 million senior unsecured term loan due Dec. 31, 2012 to 'BB+' from 'BB';

--Senior unsecured notes and debentures to 'BB+' from 'BB'.

New Communications Holdings, Inc. (Spinco)

--IDR to 'BB+' from 'BB';

--Senior unsecured notes to 'BB+' from 'BB'.

Industrial development revenue bonds (IDRBs) to 'BB+' from 'BB' as follows:

--Maricopa County Industrial Development Authority (AZ) IDRB series 1995.

In addition, Fitch expects to withdraw the rating on Frontier's $250 million senior unsecured credit facility after the close of the transaction as the facility will be terminated. The IDR assigned to New Communications Holdings, Inc. will also be withdrawn after the July 1, 2010 close of the transaction, since the entity will merge with and into Frontier and cease to exist. Thereafter, the issue ratings pertaining to the New Communications Holdings debt issues will be listed under Frontier on Fitch's website.

Fitch has downgraded the ratings of Verizon telephone operating subsidiaries which Frontier will be acquiring as follows:

Verizon North Inc.

--IDR to 'BB+' from 'A';

--$200 million unsecured notes due 2028 to 'BBB-' from 'A'.

Verizon West Virginia

--IDR to 'BB+' from 'A';

--$50 million private placement notes due 2029 to 'BBB-' from 'A'.

A Stable Outlook has been assigned to all IDRs and issue ratings.

The upgrade of Frontier's IDR to 'BB+' from 'BB' reflects the meaningful improvement anticipated in its credit profile following the Verizon transaction. Fitch anticipates that Frontier's pro forma gross debt to EBITDA (including integration expenses) at year-end 2010 will be in the 3.0 times (x) to 3.1x range, substantially lower than the 4.3x recorded at year-end 2009 due to the delevering effect of the transaction. In addition, cash flows will benefit from Frontier's planned 25% reduction in its per share common dividend after the close of the transaction. The reduction will enable Frontier to more rapidly expand the availability of broadband services in the acquired properties, a key element in the company's plans to reduce access line losses to competitors.

The potential for further improvements in Frontier's leverage will be restrained over the next one or two years. Free cash flow will remain modestly positive, and affected by the integration costs incurred to realize anticipated synergies and by the broadband expansion investments. Fitch believes free cash flow and financial flexibility could gradually improve as Frontier makes progress on these initiatives. The successful realization of synergies would enable the company to sustain its relatively strong margins, at least in the near term, in the face of continued competition.

Fitch's view of competition and its effect on Frontier's operations is also reflected in the company's ratings. Frontier's core rural telecommunications operations are facing a slow but relatively stable state of decline due to the continued pressure of competition as well as a sluggish economic recovery. Through the marketing of additional services, including high-speed data, and cost controls, Frontier has been mitigating the effect of access line losses to cable operators and wireless providers.

In Fitch's view, Frontier's credit metrics have the potential to strengthen over time. A Positive Rating Outlook could result if the company is successful in driving leverage to the mid-2x range, its dividend payout of free cash flow is 55% or less (and sustainable), and the Verizon lines have been successfully integrated. Fitch also believes an improvement in the performance of the former Verizon properties under Frontier's rurally-focused business model would need to be demonstrated. Conversely, a Negative Rating Outlook may result if the company's leverage metrics rise to 3.3x to 3.4x or greater.

Frontier and Spinco demonstrated relatively strong access to the capital markets by raising the proceeds needed to complete the transaction in their entirety in March 2010. Currently, Frontier has ample liquidity which is derived from its cash balances, free cash flow, and its revolving credit facility. At March 31, 2010, Frontier had $331 million in cash and, in the last 12-month period ending March 31, 2010, free cash flow was approximately $135 million. Frontier's expectations for 2010 capital spending range from $220 million to $240 million on a stand-alone basis, and an additional $180 million will be spent on integration activities in anticipation of the Verizon line acquisition.

Following the close of the transaction, liquidity will be provided by a $750 million senior unsecured credit facility, which will be in place until Jan. 1, 2014. The new facility will replace an existing $250 million senior unsecured facility. The new facility will be 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 $6 million of debt due in 2010, $280 million due in 2011 and $180 million due in 2012. Following the close of the Verizon line acquisition, there will be virtually no change to Frontier's anticipated 2010-2012 maturity schedule.

The rating reflects the application of Fitch's current criteria which are available at '[ www.fitchratings.com ]' and specifically include the following reports:

--'Corporate Rating Methodology' (Nov. 24, 2009);

--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).

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

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