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Earn 16% Yield To Maturity With Frontier Communications 2021 Bonds

Jeremy LaKosh profile picture
Jeremy LaKosh
3.52K Followers

Summary

  • Frontier bonds, like its stock, have been declining since the company's earnings report.
  • Frontier's revenue decline should be overshadowed by its increased expense decline.
  • Frontier's cash flow should be sufficient to support short-term debt, but how long can Frontier go without needing to refinance?

Frontier Communications (FTR) stock has resumed its decline following the announcement of third quarter earnings on November 6 th. The declines also extended to the company’s bonds. Even shorter-term bonds, such as Frontier’s July 2021 maturing notes, declined in price from the mid-90s to 86 cents on the dollar. With a 9.25% coupon, the bond’s yield to maturity exceeds 16% and may present an attractive investment opportunity if the company is able to support its debt load.

Source: FINRA

From a profit and loss standpoint, Frontier’s revenue continues to decline. Year to date, Frontier’s revenue has declined by more than $400 million. Fortunately, for every dollar in revenue declines, Frontier has managed to cut operating expenses by two dollars. Ultimately, the company’s $700 million year to date operating income was notably better than $264 million a year ago.

Source: SEC 10-Q

Frontier’s balance sheet has been quite uneventful in 2018. The company’s decline in assets, which is outpacing liabilities, is the main cause behind the decline in shareholder equity. The asset decline is led by the decrease in intangible assets, which currently accounts for more than a quarter of all assets. On the debt side, long-term debt declines are partially offset by the increase in debt due within a year. Yet, despite the increase in short-term debt, interest bearing debt is down slightly ($100 million) from the end of 2017.

Source: SEC 10-Q

Frontier’s ability to generate cash will determine whether they will be able to reduce debt. Year to date, operating cash flow for Frontier has increased, albeit marginally, from a year ago. The company’s free cash flow has decreased due to a $100 million increase in capital expenditures. Despite the decline in free cash flow, Frontier has managed to reduce debt by $150 million.

Source: SEC 10-Q

Frontier’s

This article was written by

Jeremy LaKosh profile picture
3.52K Followers
About My Writing: I am currently focused on income investing through either common shares, preferred shares, or bonds.  I will occasionally break away and write about the economy at large or a special situation involving a company I've been researching in. I target two articles per week for publication on Monday and Tuesday.About My Background: Bachelors in history/political science, Masters in Business Administration with a specialization in Finance and Economics. I enjoy numbers. I have been investing since 2000. Professionally, I am the CEO of an independent living retirement community in Illinois.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I own Frontier bonds coming due in 2019, 2021, and 2025.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (24)

corvette7 profile picture
I remember when the talk was about the great dividend then the price of the stock. Now the bonds which was not talked about much. Then the dividend went bye bye now the stock at around $2.70 u don't hear much about that. Now it's all about bonds. Their is nothing left. They tried to compete with the big guys. Look what is happening. Very sad.
r
Right, FTR used to be a decent high risk high yield stock. The current $2.70 price is after the 15 to 1 reverse split, so it's actually like 18 cents pre reverse split. WIN and FTR both have suffered from their local residential phone/tv/internet businesses, but FTR doubled down with the purchase of VZ's service in a few, large, states. Hasn't worked out and clearly FTR overpaid and it appears they will have great difficulty paying off their debts with the cash flow they have. By the way, the bond in question appears to have last traded for 77, though I can't confirm that as an accurate trade price. IBKR is showing it as last price.
r
Well, you mean like FTR just paid off their $431 million in recent maturities using up most of their revolver line? And that there is $1.6 BILLION due in 2021 (including this CCC rated bond,) not to mention another BILLION or so due before that and the operating FCF is not nearly enough to cover all of these plus necessary CAPEX, and revenues are still sinking. They overpaid for VZ assets and now they're stuck with $16 BILLION in debt. Can't imagine them being able to float equity (nor bonds at anything reasonable.)

And, the price of these turkeys is still falling, recent 82.5850, so from your 86 when this article came out, 10 days ago, knock off another 5%. Wait for 50. It will be lowered to D rating by that time, but maybe you could come out with something.
b
Yes, the bond market has woken up to the fact that not only is FTR headed for CH-11 - its liable to happen before most figured.
Roland 88 profile picture
Jeremy ,

Recently , Mar'19 due bond price stand at 98-99 , yield surge to 10% -15%.

Any bad news ? I not see any issue that FTR unable to redeem it.
Jeremy LaKosh profile picture
No bad news. Sometimes near term debt has these small fluctuations. I tend not to bite for these as they are so short term, I am going to need to find a place to put my money in 2-3 months.
O
Now the YTM of 2019 bonds is over 23%, something odd is hapening, any information leaked?
TigerMoney profile picture
Have some of the 8.875% 09/15/20 bonds. They are looking good at about 96 to 97 cents on the dollar. Much more secure than the 31 bonds if anyone is interested.

Tiger
b
Near-term bonds just don't seem worth the risk to me, as if they file for a reorg before, you risk losing 50%+.

Yeah, probably won't file before - but too little upside against the devastating downside.
Jeremy LaKosh profile picture
I tried buying those when I ended up with the 2021s. My brokerage site did not offer them (not sure why). They are looking good.
r
Ummmm, which is it Jeremy? "Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours." Or, "I tried buying those when I ended up with the 2021s."
z
Unless it forces an exchange from existing bondholder(a technical default which will cause a market loss for bondholders), any new issue is likely to be at 17% or higher. A useful analysis would show that they can survive that rate. Furthermore, in a falling price world, can they continue to generate sufficient cashflow and remain competitive while starving capital investment?
b
They can't issue new unsecured bonds.

The only play they have is to keep rolling secured debt for unsecured. But they have caps on the amount of secured debt they can issue - so, sooner or later, they'll have to seek some form of reorg.

Trouble is, I'm not sure enough of the nearer maturity bonds would sign-on for an out of court reorg. Really hard to see this playing out as anything other than a CH-11 - the only question is when.
UberB profile picture
Not with a ten foot pole.
LarryOswald profile picture
Knee jerk investing opinions are not helpful. This article represents a decent opportunity. Most agree Frontier will be able to hold things together at least until the big $4.3B tranche in 2022. This bond matures before that. Think things through.
b
Larry,

While they can theoretically make it past the 2021 maturity date, the risk is that they don't wait until the last minute, and seek some form of reorg well prior - thus impairing even the near-term bonds.
Marlon Peralta profile picture
but recommend buying?
k
Too much risk. Will not be superised to see the company filing for bankruptcy.
m
When?
G
This is a legendary catch a falling knife stock and soon will be a legendary catch a falling knife bond.
o
J
Old Professor profile picture
That a short-term Frontier bond now has to pay over 16% interest to find buyers says, in short but lucid compass, everything one needs to know about investing in what has surely been one of the worse run joint-stock companies in the history of English-speaking peoples.
Charlie's Munger profile picture
What is the yield to default here?
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