Frontier: EBITDA Might Be An Issue In 2022 And Beyond, But Not Before 2022

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About: Frontier Communications Corporation (FTR)
by: Bill Zettler
Summary

FTR debt schedule looks very doable until 2022.

If FTR loses CAF funding that will impact EBITDA.

If FTR doesn't file for Chapter 11 bankruptcy by Sept. 15 then it probably won't file before 2021 at the earliest.

I keep looking at Frontier (FTR) numbers to try to determine any justification for filing Chapter 11.

I'm beginning to think it might involve future EBITDA projections.

The importance of EBITDA going forward is obvious as emphasized in the 2018 "$500 Million EBITDA Transformation Plan."

That's because FTR's debt covenants include a debt/EBITDA ratio of 4.5.

From the 2017 10-K:

" Among other things, these covenants limit our ability to incur additional indebtedness if our leverage ratio exceeds 4.5 to 1."

Of course, the "other things" may be problematic too but we will concentrate on EBITDA in this write-up.

Here's the debt chart:

So as you can see 2019, 2020 and 2021 are no problem. Then 2022 is the Big Kahuna at $2.7b followed by an easier 2023 at $868 million. And five years from now in 2024 we have $2.6 billion but that includes mostly secured debt and a revolver which can easily be rolled over. The unsecured is only $750 million in 2024 which at that point in time can likely be handled relatively easily.

Then 2025 is the Giant Kahuna at $4.7 billion. That will have to be rolled over, therefore, FTR's debt/EBITDA ratio in the second half of 2024 will have to be low enough to allow that.

Here's a line by line explanation of the above:

1. Using latest projection from FTR for 2019.

2. The "Transformation" is not complete and may reach $250m which is $140m more (.140B). So giving the maximum transformation estimate benefit.

3. The sale of WOIM (Washington, Oregon, Idaho and Montana) will decrease EBITDA by $272m starting 2020. Using three quarters for 2020, annual thereafter.

4. CEO McCarthy stated CAF II subsidies will end at the end of 2021 and that was worth $332m in annual sales. No EBITDA is given so I'm using 40%.

5. EBITDA after subtracting WOIM and subsidy losses.

6. We know from covenants there are borrowing limits of 4.5x so that would be a minimum target for debt each year.

7. To hit the 4.5 minimum target this is how much debt would have to be paid off.

8. Assumes 4.5 is not good enough to avoid Chapter 11, we need at least 4.0 and maybe lower.

9. To hit the 4.0 minimum target this is how much debt would have to be paid off.

10. Assumes entire sale amount will be used for paydown.

11. Assumes $500m a year of FCF will be used for debt.

12. Total debt pay down assuming above is true.

13. Ratio each year as paydown ensues.

14 and 15. Uses theoretical interest savings are applied to debt.

Of course, there are a lot of assumptions here that may or may not come to fruition. As the 20th Century's most famous modeler George Box said

"All models are wrong but some are useful."

1. This model assumes revenue (and subsequently EBITDA) does not continue to drip, drip, drip lower.

2. Who knows if the entire $1.3 billion sale will be applied to debt. Seems logical, but who knows?

3. A debt ratio of 4.5 or anything close to it will not cut it. If that's what they project going forward then I would not be surprised with a Chapter 11 filing.

4. Debt ratio of 4.0 would be much better, but what are the odds of achieving that? Then they need to add a fudge factor in case things do not go as planned.

5. FCF estimates have been dropping so $500m is may be too high. We do not have numbers on FCF for WIOM or the subsidy revenue loss.

6. There will be interest savings but maybe with 5G and deteriorating wireline assets capex will have to go up over the next five years and therefore the benefits of any interest savings (and Free Cash Flow) vis-a-vis debt will be minimal. Also to refinance any of the unsecured debt they may have to pay higher rates so that could affect the interest savings negatively.

7. Even with the interest savings being applied to debt FTR will be struggling to get to the magic 4.0 leverage number five years from now.

Would FTR spend over $300 million in interest on Sept. 15 and then file for Chapter 11?

Chapter 11 filings are very expensive, sometimes up to $1 billion. So does it make sense that FTR would pay $300 million-plus interest then shortly thereafter file for bankruptcy? Doesn't seem likely.

And if they don't file by Sept. 15th when would they?

How about some time in 2021 if things don't work out?

Bond Amount Outstanding Millions Interest rate Payment Frequency Amount Due Sept. 15, 2019
9/15/2020 54 8.875 Semi-annual 2.4
9/15/2021 220 6.250 Semi-annual 6.9
9/15/2022 2,200 10.500 Semi-annual 115.5
9/15/2025 3,600 11.000 Semi-annual 198.0
Total 322.8

And if/when they do file is somewhere down the road, what happens to the stock price in the interim? I would think it would go up.

FTR remains a very, very risky stock to own.

Disclosure: I am/we are long FTR. 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.