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Tuesday 09 May 2017 by FIIG Research

Company updates

Frontier Communications – Weak 1Q17 and dividend cut

THIS CONTENT IS SUITABLE FOR WHOLESALE INVESTORS ONLY

Summary results

Source: Company reports

Main points:

Frontier cut its dividend by 62%. As a result, the company will save USD300m annually. This will increase to USD400m in 2H18 following the conversion of preferred stock, which the company has indicated it will use for debt reduction. Moody's stated that Frontier’s reduction of its dividend does not impact its B1 corporate family rating or negative outlook. Although the dividend cut and proposed debt repayment could be a positive development, Moody's estimates that Frontier is likely to still consume cash in 2017 and will not reduce total debt outstanding.
Operating results remain weak with high churn and declining revenues. Consolidated revenue of USD2.4bn fell by 13% year over year. In addition to consumer declines, Frontier was also impacted by business weakness – it lost 18,000 business customers during the quarter, up from 6,000, 1,000 and 14,000 in 2Q16, 3Q16 and 4Q16, respectively.
Frontier produced EBITDA of USD923m which covered USD388m of interest expense and USD315m of capex, leaving USD220m of free cashflow.
Gross debt declined by USD34m quarter over quarter, and cash declined by USD181m, resulting in a USD147m increase in net debt to USD17.5bn. Cashflow was negatively affected by the working capital charge and USD577m of cash interest payments during the quarter.
Net leverage was 4.39x. Given the dividend cut, Frontier now targets 4.0x leverage by the end of 2019 and 3.5x by the end of 2021.
Frontier affirmed 2017 capex guidance of USD1-USD1.25bn, integration expenses less than USD100m, cash taxes of between USD0-USD50m and adjusted free cashflow of USD800m-USD1bn. In 2018, Moody's expects a modest improvement in cashflow as integration costs roll off, synergy benefits accrue and a full year of lower dividends help offset EBITDA pressure. However, Moody's believes that Frontier is unlikely to have the ability to repay debt with internally generated cash while continuing to invest adequately into its network.

For more information please refer to Frontier’s investor relations site.

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