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CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings will maintain the 'BB+' rating on Frontier Communications Corporation's (Frontier) (NASDAQ: FTR) latest offering of $200 million of 7.125% senior unsecured notes due 2023. The notes are being issued as additional notes under the indenture governing its issuance of $600 million of 7.125% senior unsecured notes in August 2012, previously rated 'BB+'. Frontier will use the proceeds for debt reduction or general corporate purposes. Fitch's Issuer Default Rating (IDR) for Frontier is 'BB+'. The Rating Outlook is Stable.

Frontier's 'BB+' IDR reflects the meaningful improvement in its credit profile following the acquisition of access lines in 14 states from Verizon on July 1, 2010. Frontier has articulated a long-term leverage target of approximately 2.5x. The company is still above this target, as gross debt-to-EBITDA for the last 12 months ending June 30, 2012 was 3.4x. In 2012, Fitch expects leverage to improve to 3.3x, pro forma for the repayment of a $523 million maturity in mid-January 2013.

Fitch believes Frontier's 47% dividend reduction in February 2012 affirms management's commitment to improving its longer-term leverage metrics. The reduction is expected to save $348 million on an annual basis.

Ongoing competitive pressures are also factored into the ratings of Frontier. Its operations are showing a slow and relatively stable rate of decline as a result of competitive pressures and technological substitution; the sluggish economy is also having an effect. The marketing of additional services - including high-speed data - as well as cost controls have been mitigating the effect of access line losses to cable operators and wireless providers. Recently announced regulatory reforms are not expected to have a significant impact on the company in the near term.

Frontier has ample liquidity which is derived from its cash balances, its $750 million revolving credit facility, and, on a forward basis, free cash flow (FCF). At June 30, 2012, Frontier had $410 million in cash and an additional $106 million of restricted cash was available to fund certain capital expenditures. Over the last 12 months, FCF after dividends was approximately $98 million. FCF in the period was pressured by the timing of working capital needs due to the system conversion and broadband build-out as well as integration and accelerated broadband capital spending.

As a result of the effect of the dividend reduction in 2012, Fitch expects FCF to improve materially, given the lower dividend will reduce dividend requirements by $348 million annually. Fitch expects 2012 FCF to be in a range of $360 million to $400 million after dividends and integration expenses. FCF expectations reflect Frontier's capital spending guidance of $725 million to $775 million plus integration capital spending of $40 million. Capital spending is expected to decline by $100 million in 2013 as the broadband expansion is completed.

Liquidity is provided by a $750 million senior unsecured credit facility, which is in place until Jan. 1, 2014. The $750 million 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.

Frontier has $65 million of principal payments due in 2012, $581 million in 2013 and $258 million in 2014. Fitch expects the company to use cash balances and FCF to repay the 2013 and 2014 maturities.

The company's $40 million unsecured letter of credit facility matures Sept. 20, 2013. The facility has no financial ratio covenants, and other negative covenants are similar to those in its revolving credit facility. A letter of credit was issued to the West Virginia Public Service Commission to guarantee capital expenditure commitments in the state with respect to the acquisition of the Verizon lines.

What Could Trigger a Rating Action

A positive rating action could occur if:

--Fitch does not expect a positive rating action to take place in the next 12 to 18 months. Longer-term leverage would need to be at or below 2.5x, the dividend payout would need to be below 55%, and revenues would have to demonstrate sustainable growth before a positive rating action would be considered.

A negative rating action could occur if:

--The company's leverage metrics do not improve to 3.2x or below by year-end 2013 and if the company does not show continued progress in growing revenues from business and data services.

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

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