Fitch Affirms Frontier Communications' IDR at 'BB+'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed Frontier Communications Corporation's (Frontier) FTR ratings as follows:

--Issuer Default Rating (IDR) at 'BB+';

--Senior unsecured $750 million revolving credit facility due 2014 at 'BB+';

--Senior unsecured notes and debentures at 'BB+'.

The Rating Outlook is Stable.

In addition, Fitch has reviewed the ratings of other Frontier subsidiaries and issues and the rating actions are listed at the end of this release.

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 2.5 times (x). The company is still above this target as gross debt-to-EBITDA in 2011 was 3.4x. Frontier's year-end 2011 leverage was slightly higher than Fitch's expectations for 2011 leverage of 3.3x. In 2012, Fitch expects leverage to improve to 3.3x, pro forma for the repayment of a $580 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.

In Fitch's view, Frontier's credit metrics have the potential to strengthen, but improvements will be restrained through 2012. An Outlook change to Negative may result if the company's leverage metrics do not improve from year-end 2011 levels of 3.4x after the line integration is completed and if the company does not show continued progress in growing revenues from business and data services. To accomplish the latter, Fitch believes an improvement in the performance of the former Verizon properties under Frontier's rurally-focused business model will need to be demonstrated.

Ongoing competitive pressures are also factored into the ratings of Frontier. Its operations are showing a slow and relatively stable rate of decline due to 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, FCF. At Dec. 31, 2011, Frontier had $326 million in cash and, in 2011, FCF after dividends was a nominal $1 million. FCF has been pressured in 2011 by approximately $76 million of integration capital spending as well as the accelerated broadband build-out, which contributed to capital spending of approximately $748 million for the period.

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 materially 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.

In October 2011, the company entered into a five-year $575 million senior unsecured term loan with CoBank and other lenders. The proceeds from the loan were used to repay the entire amount outstanding on three debt facilities: 1) a $200 million Rural Telephone Financing Cooperative term loan maturing in October 2011, 2) a $143 million CoBank term loan due December 2012, and 3) a $130 million CoBank term loan maturing in December 2013. The principal financial covenant, net-debt-to-EBITDA of 4.5x or less, is similar to the covenant in the revolving credit facility. The term loan amortizes at a quarterly rate of $14.375 million beginning in the first quarter of 2012 with the remaining principal amount due in October 2016.

Frontier has $94 million due in 2012, $639 million in 2013 and $658 million in 2014.

The company's $100 million unsecured letter of credit facility matures Sept. 20, 2012. 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.

Fitch has affirmed the following ratings with a Stable Outlook:

Frontier North Inc.

--IDR at 'BB+';

--$200 million unsecured notes due 2028 at 'BBB-'.

Frontier West Virginia

--IDR at 'BB+';

--$50 million private placement notes due 2029 at 'BBB-'.

Fitch has withdrawn the 'BB+' rating on the industrial development revenue bonds (IDRBs) due to the small amount outstanding as follows:

--$13.6 million Maricopa County Industrial Development Authority (AZ) IDRB series 1995.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Rating Global Telecoms Companies' (Sept. 16, 2010).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Rating Global Telecoms Companies - Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=550205

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