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Rating Action:

Moody's downgrades Frontier CFR to Caa2, outlook negative

12 Aug 2019

New York, August 12, 2019 -- Moody's Investors Service (Moody's) has downgraded the corporate family rating (CFR) of Frontier Communications Corporation (Frontier) to Caa2 from Caa1 and the probability of default rating (PDR) to Caa3-PD from Caa1-PD. Moody's has also downgraded the company's first lien secured term loan B and first lien secured notes to B3 from B2 and affirmed the second lien secured notes at B3. Moody's downgraded the unsecured notes to Caa3 from Caa2 and affirmed the speculative grade liquidity rating at SGL-3. The rating outlook is negative.

The downgrade of the CFR reflects an updated assessment of the company's probability of default and recovery expectations following weak second quarter 2019 revenue and EBITDA results, continued negative net customer addition trends and reduced expectations regarding cost efficiency programs going forward. Frontier's decision to write down $5.45 billion of goodwill in the quarter reflected, in part, concerns regarding the long term sustainability of the company's capital structure and reduced expectations for the overall wireline industry. The company's potential to improve weak fundamentals in advance of sizable debt maturities beginning in 2022 remains difficult given a shortening runway to stabilize business trends. The potential for distressed debt exchanges in the next year or so is further elevated based on these operating results and other developments, including recent appointments of new Board members with restructuring and bankruptcy experience. Moody's continues to anticipate a heightened focus on potential capital structure optimization efforts given the mixed evidence of sustained progress from ongoing operational improvement initiatives.

Affirmations:

..Issuer: Frontier Communications Corporation

.... Speculative Grade Liquidity Rating, Affirmed SGL-3

....Gtd Senior Secured 2nd lien Global Notes, Affirmed B3 (LGD2 from LGD3)

Downgrades:

..Issuer: Frontier Communications Corporation

.... Corporate Family Rating, Downgraded to Caa2 from Caa1

.... Probability of Default Rating, Downgraded to Caa3-PD from Caa1-PD

....Gtd Senior Secured 1st lien Term Loan B, Downgraded to B3 (LGD2) from B2 (LGD2)

....Gtd Senior Secured 1st lien Global Notes, Downgraded to B3 (LGD2) from B2 (LGD2)

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa3 (LGD4) from Caa2 (LGD4)

....Underlying Senior Unsecured Regular Bond/Debenture, Downgraded to Caa3 (LGD4) from Caa2 (LGD4)

..Issuer: New Communications Holdings Inc.

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa3 (LGD4) from Caa2 (LGD4)

Outlook Actions:

..Issuer: Frontier Communications Corporation

....Outlook, Remains Negative

RATINGS RATIONALE

Frontier's Caa2 CFR reflects declining revenue and EBITDA which result from secular and competitive pressures, the risk that the company may not have the financial ability to continue to adequately invest in network modernization and remain competitive, and limited liquidity flexibility for addressing existing and sizable debt maturities in 2022 and beyond. In addition, there is mixed evidence for sustained progress from Frontier's comprehensive business transformation initiatives which aim to benefit EBITDA generation by $200 million to $250 million on a run rate basis by year-end 2020, a target significantly lowered from an initial goal of $500 million. These negative factors are offset by Frontier's large scale of operations, its predictable cash flow and extensive network assets. The rating is also supported by the company's improved ability to generate cash following the elimination of its common dividend in early 2018. Though Frontier expects proceeds of $1.35 billion from the sale of operations in several western states anticipated to close sometime in 2020, the use of such proceeds remains undisclosed but will likely facilitate capital structure enhancement efforts. If such proceeds are used to facilitate debt exchanges and/or open market debt purchases at distressed levels, such actions could be considered a default under Moody's definition.

Moody's believes Frontier will maintain adequate liquidity over the next 12 months with $267 million of cash on hand at the end of June 30, 2019. In addition, the company had about $520 million available under its $850 million revolver after factoring in around $80 million of letters of credit issued under the revolver. Moody's expects the company will maintain a moderate cushion on its leverage covenant over the next four quarters, including full availability on its revolver. In early 2018, Frontier amended the leverage covenant in its credit facility, which now sets a limit of 1.5x net first lien secured debt to EBITDA (as defined in the credit agreement); that limit decreases to 1.35x in 2020. A covenant breach could result in a loss of borrowing ability under the revolver.

With its March 2019 issuance of $1.65 billion of first lien senior secured notes and associated refinancing actions, Frontier extended a manageable near term maturity profile through year-end 2021 and prior to 2022, when maturities ramp to around $2.7 billion of unsecured notes. At June 30, 2019, the company had $227 million of unsecured notes due in 2020 and $309 million of unsecured notes due in 2021. We expect Frontier to have the capacity to address maturities in 2020 and 2021 with a combination of cash on hand coupled with draws upon its revolver.

The B3 ratings on the first and second lien debt reflects Moody's expectation for high recoveries for these instruments in a default scenario. Combined first and second lien leverage represents less than 2x EBITDA (Moody's adjusted) and recoveries on these instruments are supported by the preponderance of unsecured debt in the capital structure.

The negative outlook reflects the risk that Frontier may not be able to sustainably reverse its unfavorable operating trends and sufficiently stabilize its EBITDA to facilitate the successful refinancing of sizable debt maturities beginning in 2022 and beyond.

Moody's could lower Frontier's ratings further if the company's operating performance does not improve, its liquidity deteriorates, if it engages in shareholder friendly activities, if it pursues distressed debt exchanges or if capital spending is reduced below the level required to sustain the company's market position. Given the company's weak fundamentals a ratings upgrade is unlikely at this point. Moody's could stabilize Frontier's outlook if the company sustainably reverses its unfavorable operating trends and stabilizes EBITDA.

The principal methodology used in these ratings was Telecommunications Service Providers published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Frontier is an Incumbent Local Exchange Carrier (ILEC) headquartered in Norwalk, CT and the fourth largest wireline telecommunications company in the US. In April of 2016, Frontier finalized the acquisition of Verizon Communications Inc.'s wireline assets in California, Texas and Florida. Frontier generated $8.4 billion of revenue in the last 12 months ended June 30, 2019.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Neil Mack, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.

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