After many months of delay – and ten prior articles from the BDC Credit Reporter – Frontier Communications (ticker: FTR) is going to file for Chapter 11 and that’s a Good Thing for the three BDCs and the $35.1mn in debt they have outstanding to the telecom company. We’ve reviewed the various restructuring plans that management and creditors are hashing out. All include provisions for the secured debt of Frontier to be repaid with….more secured debt. This debt will have new maturities but seemingly identical pricing. All BDC exposure is in the secured debt in various forms.
Below the current secured lenders there is $10bn of unsecured debt. At a stroke, that debt is going to be swapped into equity and lenders will become owners while the current public shareholders will be wiped out, or pretty much so.
For the BDCs involved – who’ve continued to value their positions at a premium through the seemingly endless restructuring negotiations this should be a positive outcome as the restructured and relaunched Frontier Communications – when the telecom emerges from Chapter 11 – will be much less leveraged: two-thirds off (see page 34 of the slide deck).
Down the road, we may even be able to remove the company from the under performers list, but we’re not getting ahead of ourselves. First, FTR has to actually file Chapter 11 (tentatively set for April 14). Then, Frontier has to emerge therefrom which – even with a pre-agreed plan in place- is not so straightforward in the current environment. Most difficult of all, the company has to successfully re-invent itself. We won’t get into everything Frontier has been and will need to become, but look at the company’s slides 15-17 for an idea of the strategic challenge involved.
All in all, though, for the BDCs involved – our principal concern – this is a likely positive outcome when those are in short supply right now. This is hardly the end of the Frontier Communications story on these pages, but maybe – to quote Winston Churchill – “the end of the beginning” ?
On March 16, 2020 Bloomberg reported that troubled telecom giant Frontier Communications plans to skip making interest payments on some of its bonds, starting a 60 day countdown to a payment default. We’ve written nine times (!) about Frontier before, given the twists and turns of what promises to be “one of the biggest telecom reorganizations since Worldcom Inc. in 2002″.
None of that is surprising as news reports and the BDC Credit Reporter have been predicting a Chapter 11 filing and a massive re-organization for months, but does indicate the day of reckoning is coming ever closer. The bankruptcy – which we expected in the IVQ 2019 – looks likely to land in the IIQ 2020.
Since our last report a couple of the many BDCs that hold the company’s debt have reported IVQ results and their latest valuations on their Frontier positions. Oaktree Strategic Income (OCSI) and non-traded sister BDC Oaktree Strategic Income II hold the 6/15/2024 senior Term debt and – in the case of latter BDC – the 2026 Senior Note. All we can report – without comment because we don’t understand the capitalization of Frontier well enough to differ – is that the debt is still carried at a premium. Obviously, Oaktree – which must be familiar with whatever plans for a restructure are underway – believes that there will be no loss booked if and when the seemingly inevitable bankruptcy happens.
We’ve not yet heard from all the other BDCs that have a position in Frontier, most of whom are part of the FS Investments-KKR group. However, publicly traded FS KKR Capital (FSK) has reported its IVQ 2019 portfolio and we see that Frontier has dropped out since September 2019. No comment was made on the latest conference call, but we imagine management may have decided caution was the better part of valor and sold out its position. For all we know that may be true for its 4 sister non-listed BDCs. If that’s true, BDC exposure to this upcoming massive bankruptcy might be very small.
We’ll continue to track this company and expect to be discussing the Chapter 11 filing and its implications before long.
We’ve written eight prior articles about the publicly traded telecom + cable giant Frontier Communications, dating all the way back to March 2019. In fact, the company was added to our Under Performer list following IVQ 2018 results with a CCR 3 (Watch List) rating and downgraded further to a CCR 4 (Worry List) back on June 13, 2019. More recently, we predicted the company might file Chapter 11 in the IVQ 2019, but that did not happen. In our last report before this one, though, we said a Chapter 11 filing was likely in the IQ 2020. With the latest news reports, that seems likely to turn out to be true.
“People with knowledge of the matter” – and there are dozens of lenders, lawyers, insiders and regulators involved at this stage so journalists have plenty of sources – indicate the company is aiming to file a consensual, pre-packaged bankruptcy by March. On the horizon are $356mn of interest payments due in mid-March. As a result, Frontier’s new CEO and his team have been busy – according to these reports – meeting creditors and seeking to craft out a restructuring plan that would be blessed by the court. (The company itself has no comment).
From a BDC perspective, the question is now more about how each lender class will fare in the restructuring, and what impact there will be on interest income – running about $5mn a year. As we’ve noted before, the debt held by the BDC lenders remains valued at a premium to par, both in their own valuations and when we look at the market price of their secured debt on Advantage Data. Will Frontier restructure itself, go in and come out of Chapter 11 in a hurry and have no impact on the value or income of the $67.5mn in debt held by 8 BDCs ? We have our doubts, but that’s the state of play at the moment. We shall soon learn if those valuations are appropriate.
We’ve been tracking the credit decline of Frontier Communications through most of 2019, in multiple posts. The communications giant has been moved from a CCR 3 rating to CCR 4. In October, we added Frontier to our Bankruptcy Imminent list. In fact, there was no Chapter 11 or restructuring in the fourth quarter of 2019 and – given decent liquidity – there might not be any move in that direction in the IQ 2020 either. However, we’re confident enough to project that a bankruptcy in the IQ 2020 is highly likely.
BDC exposure to the company remains high with $67.5mn outstanding at cost, spread over 8 different BDCs, and three asset management organizations (FS Investment-KKR; Oaktree and Business Development Corporation of America). To date, though, all outstandings – despite ever worsening financing performance and multiple downgrades by both Moody’s and S&P – have been valued at or above par. That suggests debt investors are not worried about taking any kind of haircut should a Chapter 11 occur.
We analyzed the debt held by the BDCs against Frontier’s latest 10-Q. Broadly speaking, one third of the company’s huge debt load is secured and two-thirds unsecured. All BDC exposure is in first lien and second lien secured debt, which explains debt holder sanguinity. Valuations did not materially change at the top of the capital structure even after Frontier’s CEO left his post in early December, and replaced by a former DISH executive first brought in as a financial adviser and then appointed to the top job.
Nor were senior debt holders fazed – if prices reflect their views – by the never ending drop in the company’s stock price – now being de-listed from the NYSE and trading under $1.0. Since we wrote our first post, Frontier has lost two-thirds of its market capitalization.
We’re not so sure that Frontier’s senior lenders – including those 8 BDCs – should be so complacent about the value of their loans – which mature between 2024 and 2027, according to Advantage Data’s summary records. Our suspicions are confirmed by an article in Seeking Alpha on December 31, 2019 by Gary Chodes, which seeks to evaluate what the recovery rate on Frontier’s secured and unsecured debt might be if worst came to worst. The conclusion of interest to senior lenders: an estimated 24% recovery rate. That would imply over ($50mn) in ultimate Realized Losses for the BDC group, not including interest forgone. Readers can make up their own mind about the validity of Mr Chodes calculations. We don’t have a deep enough understanding of the company’s financial situation and business prospects to offer up a competing view. Instead, we offer up this warning on a take it or leave it basis. In any case, we expect to be returning to the Frontier Communications imbroglio repeatedly in 2020.
The Frontier Communications saga continues with hedge fund and investor Robert Citrone recommending the company file for Chapter 11 bankruptcy sooner rather later. As the attached article reminds us, there’s an ongoing debate amongst “stakeholders” as to what the communications company should do to deal with its heavy debt load and uncertain future.
“Normally haste makes waste, but in this instance we believe haste limits waste,” Ormond said in the letter. “The further the delays in addressing the balance sheet and state of the business in a court-supervised process, the greater the risk to the corporation, operating assets, employees and surrounding Norwalk.”
Increasing subscriber losses and turnover, combined with limited financial guidance, will only lead to further deterioration in the business, according to the letter.
We have no view on whether to file or not is better, but the pressure does increase the chances of the former. We are adding Frontier to our Bankruptcy Imminent list. The company is already rated CCR 4 (Worry List). As a reminder BDC exposure is substantial at $61.7mn and valued close to par. A bankruptcy could have detrimental effects – but to varying degrees – on the 9 BDCs involved.
Those are sighs of relief you’re hearing. On September 16, 2019 the Wall Street Journal reported that Frontier Communications was making its scheduled debt payments. This would not normally be news, but many investors were – apparently – concerned the troubled and highly leveraged communications company might choose to file for Chapter 11 or a restructuring instead.
That’s good news of a kind, but the problems at Frontier continue, so this may be more respite than anything else. (We’ve written about the company multiple times previously. Here’s a link to the list of articles). There is $62mn of debt outstanding at 8 different BDCs and over $5mn of annual investment income at risk. The exposure is carried as of June 2019 at close to par, so if anything negative happens to Frontier in the future the impact will be material from a BDC perspective (and much more so in the high yield bond market). For the moment lenders and shareholders can breathe easy. Tomorrow, though, is another day.
On June 20, 2019, S&P Global Ratings downgraded “its long-term issuer credit rating and issue-level rating to CCC from CCC+, with a negative outlook. It’s also trimmed its rating on senior secured first- and second-lien debt to B- from B”, according to Seeking Alpha. The rating group went to say: “Notwithstanding its favorable near-term liquidity position,” the company will likely look at options “given the business’ downward trajectory and inability to refinance looming unsecured debt maturities in 2022, which are trading at deeply distressed levels,” S&P says. From the BDC Credit Reporter‘s standpoint, this only confirms our prior assessment that a bankruptcy or restructuring is more likely than not. We’ve had the company on our Worry List all year. The stock price is now $1.35, but was recently at an all time low of $1.21.
Bloomberg published an excellent article about the different constituencies amongst Frontier Communications creditors, and the several alternatives being considered to cope with the telecom company’s mountain of debt. No change to the BDC Credit Reporter‘s views, as noted in the Company File.
Despite Frontier Communications recent asset sales, which will reduce its debt mountain, the regional telecom remains in trouble. On June 12, 2019 a JP Morgan analyst downgraded some of the company’s bonds; and the stock price dropped as much as 13% in reaction. Also, a distressed fund manager predicted a Chapter 11 filing would happen in 2019. Currently, the publicly traded FTR trades below $1.50, close to it’s all-time low. This must be disturbing for the multiple BDC lenders – in 4 different debt facilities from senior to subordinated, and in maturities as long as 2027. As we’ve noted in prior articles, BDC exposure aggregates $44.2mn, with non-traded Business Development Corporation of America (BDCA) with the largest exposure by far (nearly $40mn), including some junior. The only public BDC lending to Frontier is OCSI, with $1.5mn in 2024 Senior Term Debt and under $100,000 a year of investment income at risk of interruption. Frontier has been moved to our Worry List , just one step away from bankruptcy or restructuring, along with 32 other troubled BDC borrowers.
May 30, 2019: Yahoo Finance reported Frontier Communications Corporation (ticker: FTR) announced that it has inked a deal to sell its assets and operations in 4 states. The transaction is valued at $1.352 billion in cash, and is subject to regulatory approvals.The sale proceeds are likely to be utilized to pay off the company’s financial obligations. As of Mar 31, 2019, it had $119 million in cash and equivalents with $16,526 million of long-term debt. At the end of first-quarter 2019, Frontier Communications’ leverage ratio was 4.76:1. For the 5 BDCs involved, with $44mn in senior and subordinated debt at risk, this keeps the wolf at bay but is unlikely to result in full repayment at par. This remains on our Watch List.
On March 12, 2019 publicly traded telecom company Frontier Communications (FTR) announced its intention to raise $1.65 billion in “First Lien Secured Notes”, due in 2027. The proceeds from the new debt will be used – amongst other purposes – to refinance “all outstanding indebtedness under its senior secured term loan A facility, which matures in March 2021”. Oaktree Strategic Income (OCSI) is the only public BDC with exposure to Frontier Communications, all in the 3/31/2021 term loan A facility. Total outstandings at cost are $2.859mn and were valued at December 31, 2019 at $2.780mn. No date for the closing of the refinancing has been set, which could occur in the IQ of 2019 or the IIQ. OCSI should book an immaterial increase in value and lose an asset earning only LIBOR + 2.75%, or slightly over 5% per annum. This is a recent loan for OCSI, which only began lending in the IIIQ of 2018 under the new Oaktree management.