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Fitch Rates Frontier Communications' $190MM Credit Facility 'BB+'

^{Published on 2010-09-15 12:25:42 - Market Wire}
 

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings has assigned a 'BB+' rating to Frontier Communications Corporation's (Frontier) (NYSE: FTR) new $190 million senior unsecured credit facility. The facility was put into place to support Frontier's requirements to post a $190 million letter of credit in West Virginia in connection with certain capital expenditure commitments made to regulators. The commitments were made by Frontier to gain approval in West Virginia of the acquisition of access lines from Verizon Communications, Inc. (Verizon) (NYSE: VZ). Frontier's Issuer Default Rating (IDR) is 'BB+' and the Rating Outlook is Stable.

Frontier's 'BB+' IDR reflects the meaningful improvement anticipated in its credit profile following the acquisition of access lines in 14 states from Verizon on July 1, 2010. 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, Frontier's 25% reduction in its per share common dividend will redirect cash to the expansion of 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 company's ratings also reflect Fitch's view of competition and its effect on Frontier's operations. 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 cost controls and the marketing of additional services such as high-speed data, 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 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 Outlook may result if the company's leverage metrics rise to 3.3x to 3.4x or greater.

Frontier has ample liquidity which is derived from its cash balances, free cash flow, and its $750 million revolving credit facility. At June 30, 2010, Frontier had $231 million in cash and, in the last 12-month period ending June 30, 2010, free cash flow was approximately $116 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.

The new $190 million credit facility matures Sept. 20, 2011, unless extended until Sept. 20, 2012. The facility has no financial ratio covenants, and other negative covenants are similar to those in its existing facility.

In addition to the new credit facility, liquidity is provided by a $750 million senior unsecured credit facility, which will be in place until Jan. 1, 2014. The $750 million 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 $5 million of debt due in the remainder of 2010, $280 million due in 2011 and $180 million due in 2012.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 16, 2010);

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

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

Liquidity Considerations for Corporate Issuers

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666 ]

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