FROM THE SALES DESK
In recent years, Frontier has battled with the integration of the broadband fibre optic assets acquired from Verizon. In the face of declining legacy fixed phone line revenues, the company’s acquisition of these Fibre To The Home (FTTH) assets drastically improved the company’s future value proposition.
The cost of the acquisition increased debt, which put the company’s balance sheet under pressure. Its poor integration of the acquired assets and subsequent continued decline in net subscriber additions has further pressured the company’s credit profile and led to declining bond prices.
Operating in a highly competitive sector, the company’s strained balance sheet leaves little financial flexibility and limits the company’s ability to continually adapt in a capital intensive telecommunications industry.
The company plans to reduce balance sheet pressure and improve liquidity by:
- Cutting dividends, which will free up ~USD500m annually
- Realising ~USD350m in annual synergies by mid-2018
- Increasing free cashflow from improving operational performance
Earnings Report and Conference Call – 3Q17
Frontier Communications reported 3Q17 results with revenue in line at USD2.25bn and adjusted EBITDA of USD914m. The company continues to stabilise the business through customer experience initiatives reducing churn in both its legacy and Fibre Optics products. As a highlight, the company has achieved pre acquisition level of CTF (California Texas Florida) Fibre Optics broadband gross adds and expects to see net growth in the coming quarters which will begin to offset the decline in legacy revenues. Frontier continues to reiterate its guidance of achieving annual synergies of USD350m by mid 2018.
Financials
*As reported by the company - see company financial statements for adjustments
**Interest coverage for 3Q17 not last twelve month basis
Highlights
1. Customer Churn
a. Frontier is delivering on its strategy to reduce churn that is subscriber losses. The acquired fibre optic assets continue to grow in gross adds (now at growth levels equal to pre acquisition and sees growth in the coming quarters on a net add basis)
b. This turnaround in CTF net adds has been driven by business initiatives to improve customer experience
c. The company sees current penetration in CTF areas of ~40% and reiterates its stance on it being a 'vibrant growth market'
d. Growth in these areas is expected to offset continued declines in legacy revenue
e. In terms of product offering, the company gave guidance that it has the ability to have its own ‘compelling’ over-the-top video product as it has the content to do so. This is likely to help boost its video sales and add to a sustainable and valuable bundling proposition
Source: Frontier, FIIG Securities
2. Debt Reduction and Capital Structure
a. The company reiterated its commitment to debt reduction; planning to pay down near term debt maturities with cash on hand
b. Frontier plans to address its debt reduction through continued business improvement in operational and financial performance which will lead to an increased likelihood of the company being able to access the bond market to meet more onerous medium term debt maturities
Frontier Communication debt maturity profile as at 30 September 2017
Source: Frontier, FIIG Securities
FIIG make available three Frontier USD denominated bonds. The bonds are available to wholesale qualified investors in minimum USD10,000 parcels. Yield to worst on the bonds is as follows:
| Security | Maturity date | Coupon | Yield to worst |
| FRONTIER-6.52%-15Sep21-USD | 15-Sep-21 | 6.25% | 11.404% |
FRONTIER-7.125%-15Jan23-USD
| 15-Jan-23 | 7.125% | 13.717% |
| FRONTIER-8.5%-15Apr20-USD | 15-Apr-20 | 8.5% | 8.611% |
| FRONTIER-9.25%-01Jul21-USD | 1-Jul-21 | 9.25% | 12.655% |
| FRONTIER-11.00%-15Jun25c-USD | 15-Sep-25* | 11.00% | 15.281% |
Source: FIIG Securities
Prices accurate as at 2 November 2017 but subject to change
*This bond has a 15 June 2025 call date
Note: The above article was not written by the FIIG Research team. Additionally, FIIG Research does not assess these companies. We are assisted by independent third party research, to increase the number of bonds we make available. Companies and bonds need to meet certain qualifications before we issue them in small parcels. For more information please see the new DirectBond process for non Australian dollar high yield bonds