Frontier deal tees up more strategies targeting high coupon, restrictive CTF notes

Frontier Communications’ new USD 1.6bn 8.5% second lien bond raise sets the stage for management and investors to plot out scenarios under which the company can redeem certain high coupon bonds restricting the balance sheet, according to four buysiders.

Proceeds from the second lien deal will be used to launch partial tenders for the borrower’s USD 1.06bn 8.875% unsecured notes due 2020, its USD 775m 6.25% unsecured notes due 2021, USD 500m 9.25% unsecured notes due 2021, USD 1.25bn 8.50% unsecured notes due 2020, USD 500m 8.75% unsecured notes due 2022, USD 2.18bn 10.5% unsecured notes due 2022 and USD 850m 7.125% unsecured notes due 2023.

The deal chips away at near-term maturity hurdles, and should help reduce the burden the smallest of the bonds that partially funded the company’s acquisition of Verizon’s CTF assets, the USD 1bn 8.875% 2020 notes, which are first priority in the tender offer.

But it still leaves Frontier subject to high interest payments on its remaining CTF bonds—a USD 2bn 10.50% unsecured note due 2022 which is a much lower priority in the tender offer, and a USD 3.6bn 11% unsecured note due 2025 which is not being targeted.

The company is likely to try to tackle the remaining CTF bonds sooner rather than later, said several buysiders following the transaction.

“We think they go after the CTFs just because the coupons are so high,” said a buysider. “They have remained committed to paying down debt, and the CFO is going to be thinking about these bonds by the hour. Everyone knows it is not prudent to keep a double-digit coupon around on your balance sheet. They are screaming to be taken out, and this is the first step towards finally doing so.”

Not only are the CTFs costly from an interest standpoint, they are also restrictive on new debt raises since the second lien offering exhausted secured debt capacity previously allowed in the CTF indenture, two of the buysiders noted. As for the new second liens, they permit additional secured issuance up to 2x secured leverage, the sources added.

Pro forma the new deal, Frontier’s secured leverage stands around 1.4x based on LTM EBITDA of USD 3.68bn through 31 December and secured debt of USD 5.218bn. That leaves an additional secured debt basket of around USD 2.142bn before the company taps that 2x limit.

Allowable secured capacity could balloon should EBITDA hit a growth track this year. However, the reverse is also true, and time may be of the essence since management’s 2018 guidance lists EBITDA going down to approximately USD 3.60bn.

One potentially uneconomical drawback to targeting the CTF notes is they are non-call life and trade with steep yields below par. The USD 1bn 8.875% unsecured notes due 2020 last traded at 103.25 to yield 7.296%, while the USD 2bn 10.5% unsecured notes due 2022 last traded at 87 to yield 14.532%, and the USD 3.6bn 11% unsecured notes due 2025 last traded at 80.25 to yield 15.549%.

Of note, the credit agreement as amended earlier this year allows for a USD 800m carveout for first lien debt, according to a company presentation.

The 2018 guidance for adjusted EBITDA at approximately USD 3.6bn implies annual free cash flow at USD 800m, which would enable Frontier to pay off other near-term maturities with liquidity in the next year, several sources agree.

Liquidity as of 31 December included USD 362m cash and USD 787m of revolver availability.

The company’s new USD 1.6bn 8.5% unsecured notes due 2026 traded at 99.75 this morning for an 8.543% yield, according to MarketAxess. The company’s stock traded at USD 8.43 today for a market cap of USD 661.5m, up 1.81% from yesterday’s close.

Messages left for Frontier officials were not returned.

2018 Debtwire

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