Frontier Fuels Speculation on Its Fate by Draining Credit Line

(Bloomberg) -- Frontier Communications Corp. added to speculation that it's headed for a restructuring by posting weak quarterly results and drawing on the rest of its credit line for almost half a billion dollars.

The wireline communications company disclosed Tuesday that it borrowed $499 million that remained in its $850 million revolver during the third quarter. Troubled companies often exhaust their credit lines to build cash ahead of a debt deal or bankruptcy filing -- a scenario Frontier has said is possible -- and it's negotiating with creditors about ways to ease its $17 billion debt load.

Frontier boosted its unrestricted cash to $683 million at the end of the quarter by emptying the credit line, even though it generates positive free cash flow and doesn't face sizable debt payments until March, according to Stephen Flynn, a credit analyst at Bloomberg Intelligence.

Creditors have been pushing Frontier for a plan to tackle its debt, with Robert Citrone's hedge fund, Discovery Capital Management LLC, arguing that investors will fare better if it files for Chapter 11 sooner rather than later.

Other stakeholders may have written contracts that insure debt holders against default and would like to see the company hold off on filing for court protection until at least next year.

A representative for Norwalk, Connecticut-based Frontier didn't have an immediate comment.

Frontier has more deeply distressed bonds than any other North American issuer -- many of the notes trade for less than half their original value -- and third-quarter results didn't offer much encouragement. Revenue fell 6.1% and a measure of adjusted earnings was down 8.4%, according to its earning statement. Those declines were both larger than expected, according to Flynn.

Weak Quarter

“The third quarter was surprisingly weak,” Flynn said in an interview. “It's definitely logical to try to bring in as much liquidity as they can, while they can, ahead of any potential addresses to their capital structure.”

Frontier has $333 million of interest due on its unsecured bonds and first-lien debt on March 15, and another $381 million in April, according to data compiled by Bloomberg. Those dates could be the next trigger for a restructuring, Flynn said, but he added that Frontier now has enough cash to keep going until 2022, when $2.7 billion of unsecured bonds mature.

The 8.75% unsecured notes maturing in April 2022 fell 2 cents on the dollar to 45 cents Wednesday. The 10.5% notes due September 2022 were little changed at 46 cents.

The credit line draw is notable because the company is expected to post better free cash flow in the fourth quarter and for the full year, according to Dave Novosel, an analyst at Gimme Credit. He estimates $300 million of free cash flow for the year.

“When you compare that figure to other types of bankruptcy situations over the past year, that's actually pretty good,” he said.

Frontier is also expecting to complete its sale of assets in Washington, Oregon, Idaho and Montana for $1.35 billion in the second quarter of 2020, which will further boost its cash position, Novosel said. It's unlikely that the company will file for bankruptcy in the next quarter or two given the liquidity position, he said.

But over the long term, the writing is on the wall for Frontier, given the overall decline of its wireline business and its need to fund growth in the broadband unit, Novosel said. The company provides telecom and Internet service to rural households and businesses.

“I don't know if this is a good business,” he said.

To contact the reporter on this story: Allison McNeely in New York at amcneely@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, Christopher DeReza

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