Frontier Communications - The Long Journey Into The Insolvency Zone

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Gary Chodes
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Summary

  • Frontier sits on massive $17.5 Billion legacy debt Load.
  • In June S&P downgraded the bulk of Frontier's debt to CCC with a negative outlook.
  • The majority of Frontier unsecured debt trades at 45 to 47 cents/dollar (as of Dec 13.2019).
  • Creditors face an existential threat in 2022 with $2.7 billion coming due.
  • My Conclusion:Unsecured Note holders will be lucky to get 7 cents on the dollar; SeniorSecured holders 24 cents on the dollar.

Situation Analysis

The New Board Brings Unneeded Entanglements

The independent directors that now make up Frontier Communication's board - and their compatriots at restructuring boutique M-III Partners - are currently involvement in perhaps a dozen other large bankruptcy cases simultaneously. Many of these restructurings involve competing interests that are not fully disclosed; they involve bondholders that straddle multiple cases, overlapping financial advisers and legal teams with potential conflicts. Others involve deeply distressed companies on the verge of bankruptcy - and like the situation here - those boards and their legal teams are strongly considering filing bankruptcy petitions in the near term.

Bankruptcy at Frontier is Inevitable

Once in a chapter 11 proceeding, the playing field changes - sometimes dramatically - in ways that are not always obvious or even predictable.

This should be the lens through which any existing Frontier investor and bondholder views their options. As for an investor on the sidelines considering this a ripe distressed opportunity - caveat emptor.

Even with the best of intentions, it strains credibility to believe that the board members, with their other board obligations, will be able to provide the necessary time and attention to achieve an optimal outcome for Frontier's existing stakeholders. Worse yet, the inherent conflicts that now permeate the Frontier board could serve to benefit the droves of to-be-hired restructuring professionals and lawyers - to the detriment of Frontier's creditors - as the company moves closer to an inevitable bankruptcy filing.

The Company's stock now trades for $.68 / share and the market cap is only around $72 million dollars. On December 16, 2019 the company received a non-compliance notice from NASDAQ and risks delisting in June 2020. In my opinion, the Company has now moved into the Insolvency Zone.

Inaccuracy of Recent Disclosures to Investors and Bondholders

Most critically - creditors and shareholders of Frontier need accurate and unbiased information quickly as a basis to make decisions and evaluate their holdings. My premise is that Frontier - with its current board make-up - cannot be trusted to provide anything remotely resembling an accurate view of the current landscape or the true financial condition of the business. In particular, the picture presented in its most recent public filings (i.e. the Sept 30, 2019 10Q) and its accompanying November 5, 2019 Investor Update give an impression of solvency - and even viability as a going concern - that is grossly misleading. Management's allusions to stabilization of customer churn or growth in the fiber segment are ludicrous. My analysis and ultimate conclusions about the financial condition of the business and its balance sheet are detailed fully in this report. I summarize a key finding regarding the value of the company's debt in this next section, as a means to highlight some of the major credibility issues surrounding the November presentation materials.

The Vast Gulf - My Valuation of Frontier's Bonds vs the Board's

The company reported that its $17.5 billion of face value of debt had a "Fair Value" of $11.69 billion at September 30, 2019 - only a slight decrease from the $12.75 billion fair value at year end 2018 (See Exhibit A at the end of this report). These estimates are based on supposed market checks as to bond pricing. These fair value estimates - indicating a relatively benign 32% discount to par - leaving the impression that a voluntary negotiated settlement with creditors in the near-term is possible.

The fact is that majority of the company's $17.5 billion in unsecured bonds trade below 50 cents on the dollar - and did so at the time these numbers were released. But by my calculations below - Frontiers $10.9 billion unsecured debt load - is ultimately worth pennies on the dollar and is perhaps completely worthless. The gap here is so wide that the two notions cannot be reconciled.

But it's critical to note - there is no apparent new information, change in market condition, financial event, increase in interest rates, rating agency downgrade, default or other news item that occurred between Nov 6 and today that would have changed the value of the Company's bonds. I am basing my valuation of the debt on the information that was publicly available in November. In fact - my entire analysisbased on that very information the Company provided in the November Investor Update.

The fact that the CEO departed less than a month after this information was published is deeply troubling. The board must take responsibility now for the misinformation provided and immediately update stakeholders on how dire the situation really is.

Brief History - The Sorry Legacy of the Verizon Deal

The best way to understand how Frontier ended up in a bottomless pit of liabilities is to take a brief look back in time. The Company provides communications services to roughly 3.8 million customers in 29 states, many in rural or otherwise under-served communities. The Company changed the course of its future when it completed the ill-advised $10.5 Billion acquisition in April 2016 of Verizon's wireline business in Texas, California and Florida. To fund the acquisition, the Company took on an enormous debt burden. That debt burden has now proved fatal to the Frontier. At the time the deal was announced in early 2015, Frontier's market value hit $8.4 billion. By mid- 2017, Frontier's market cap was down to $1.4 billion.

Moody's analyst Mark Stodden was prescient back in 2017 when he wrote "…. there's concern that Frontier will reduce capital spending. That's a major risk because infrastructure needs to be upgraded in most of its territory. And "under-investment has long-term implications" that don't show up in current results, he said.

As was predicted, Frontier fell further and further behind its much larger competitors, despite investing nearly $300 million a quarter to maintain its legacy copper and fiber broadband networks. Both its consumer and commercial segments have been in multi-year sequential decline; its "video" services unit FiOS - acquired from Verizon - is simply a relic. The bottom-line - Frontier's business is now in free-fall without hope of recovery.

2019 Reckoning

In the second quarter of 2019, the Company took a final $5.7 billion goodwill impairment, erasing what's was left of the premium paid in the botched Verizon deal. This was simply an accounting fait-accomplit - Frontiers' goodwill could have been written off completely long ago. Long serving CEO Dan McCarthy - who orchestrated the ill-fated Verizon deal - "retired" on December 3, 2019 after 29 years with the Company. His departure was a symbolic severing of the final vestiges of the Verizon transaction.

Ticking Debt Time Bomb and the Announced Sale of Northwest Assets

Thisa company with a quarterly interest load of $380 million; its looming 2022 maturities are ticking time-bomb with a two and a half year fuse. To be specific -$500 million of its Senior Unsecured Notes come due on April 15, 2022, followed by $2.188 Billion of its Senior Unsecured Notes coming due on Sept 15, 2022 (see Chart below). The company needed to pull a "rabbit out of its hat" to address its suffocating debt. So earlier this year (then) CEO McCarthy announced an agreement to sell the infrastructure and assets of Frontier's Northwest Operations - namely in Washington, Oregon, Idaho and Montana - for $1.35 billion.

Northwest Sale - Why Believe?

Of course asset sales seem a logical near-term tactic. After all, the deal is expected to close in the second quarter of 2020, which presumably would give the company some critical breathing room. The Company's now departed CEO McCarthy highlighted the Northwest Operations sale's significance in the November 5th Investor Update presentation (his last). I discuss the anticipated asset sale further in my Pro Forma analysis later in this report. But the more important lesson is - given the lack of credibility for management - can the terms of this transaction be taken at face value. Scant details about the sale have been made available. The buyer is not a major broadband or wireless player - but a newly formed company affiliated with private equity investors Wave Division and Searchlight Capital Partners. Neither party offered much in the way of details of what Frontier customers can expect after the sale closes - if it goes through at all. DSL Reports commentators' quotes regarding the Northwest Operations transaction include:

"… this deal is Private Equity vultures picking at the scraps of a dying TELCO long enough to gut it and sell off the fiber assets to someone else.

"I also wouldn't be surprised to see everything outside of Portland and Seattle get sold off again to small independents and cooperatives in the region. The fiber assets in the Portland and Seattle areas are much more valuable."

"Anyway, mark my words, they are going to sell off these rural areas, piece by piece."

So why trust Frontier's board regarding this Northwest sale given the other load of bunk they put in the November Investor deck?

Operating Free Cash Flow - a Sick Measure

In this same November 2019 presentation, the Company promoted two highly misleading non-GAAP metrics - Operating Free Cash Flow (pre-interest but after subtracting CapEX) and Adjusted EBITDA - which I will now dissect further. Suffice it to say these metrics (both Operating Free Cash Flow and Adjusted EBITDA) contains a slew of supposed one-time add backs that mask the dire nature of the condition of Frontiers business and its lack of the ability to generate cash for debt service.

Using these distorted measurement methods, the company wants its stakeholders to believe its third quarter 40.3% adjusted EBITDA margin is somehow an indicator of underlying health; after-all that same margin percentage was 41.3% in Q1 2018 (which is not much of a drop). But it's the absolute dollar margin - not the percentage - that counts in a free fall environment. And only absolute dollars can serve debt denominated in absolute dollars.

Frontier's investor presentation (not so) subtly hides the following truth - LTM Operating Free Cash Flow at Sept 30, 2019 was only $563 million. So even using its own distorted metrics - the company only generates enough Operating Free Cash Flow on an annual basis to cover 4 months of its annual interest costs of $1.52 billion.

Disappearing Customer Base

But it gets worse. Virtually all of Frontiers' revenue is contractually driven. The table below illustrates the dramatic fall-off in contractually promised customer payments that will hit very hard in 2020. Supposedly the to-be-acquired Verizon Texas, California and Florida customer base - when the deal was announced in early 2015 -comprised roughly 3.7 million voice connections and 2.2 million broadband customers. Yet Frontier only has 3.8 million remaining customers in total as of Sept 20, 2019. Where did the rest go?

CHART A - Customer Burn-Off

More Truths Regarding the Northwest Sale

This sale came at an exceptionally high price; in addition to recognizing a $384 million "book" loss on the sale in Q2 2019, the transaction requires a "fully-funded" contribution for related pension obligations of $146 million at closing and a six month post-closing support services agreement.

As stated above, the timing of and ultimate recovery from the sale itself isn't a sure thing; it needs regulatory approval and is subject to "normal" reserves and offsets. Those provisions were negotiated with sharp elbowed private equity buyers with smart lawyers. Given Frontier's abysmal customer service track record in the wake of the Verizon transition- this closing will not be as simple as first described. At best a reasonable investor should not expect a net recovery above $1 billion.

What's Left?

What remains is a hodge-podge of mostly rural telecommunication assets spread across 25 states that are expensive to maintain. The Company is a participant in the FCC's Connect America Fund (C.A.F.) Phase II program, which subsidizes its broadband costs in many of these under-served rural communities. The CAF subsidy is meaningful, providing Frontier with $90 million per quarter. That makes up literally 64% of the company's Operating Free Cash Flow - and unlike all of the company's other key metrics - the government subsidy is steady quarter to quarter.

But thisa real "Hobson's Choice"; in order to get the subsidy, the company must continue to invest enough in CAPX and services to bring a mandated minimum target number of its rural customers up to higher broadband "speeds" by 2020 - or risk both being cut-off from the program going forward and having to return funds previously received from the CAF Fund.

M-III and the Board - What to Expect Now

The new board members - experienced turnaround advisers - were five months on the job when the distorted November 2019 Investor presentation was published. Granted the board members didn't certify the Q3 financials or put their names in the November-issued investor deck. Still the board was complicit in allowing the misleading information in the key November Investor Update to be publicly released.

They say past is prologue. Let's look to what Frontier's newly minted board members have done in similar restructurings as possible predictor of the future behavior. Frontier can theoretically be likened to a regulated energy or telecom utility, with government mandated service requirements, customer's tethered in established geographic regions with monthly contracts and near monopoly power. Historically, those types of businesses were expected to be stable in the long run and provide regular dividends to investors. But that historical landscape no longer exists.

Energy Future Holdings - Is this the Prototype?

Perhaps the best analogy for the morass Frontier faces would be the April 2014 Chapter 11 filing by Energy Future Holdings (EFH) - parent company of TXU - the largest retail electric utility in Texas. New Frontier board member Mohsin Meghji - along with several of his other new board colleagues and their affiliates - were boots-deep in the EFH restructuring. The ill-fated $45 billion EFH private equity buyout in 2007 saddled this otherwise stable electric utility with $42 billion of debt. There were many twists and turns in EFH's four year trip in bankruptcy court (until it wrapped up in March 2018).

EFH "crown jewel" - the regulated utility Oncor - eventually sold for about $19 billion. What remained was spun-off (in a non-cash transaction) and is at best worth $20 billion. The bitterly fought Oncor sale process ate up nearly three years and was incredibly expensive. Successive reorganizations plans were proposed, approved and scrapped in multiple times in 2015 and again in 2017 to navigate shifting sands. Arguably, the restructuring wiped about $10 billion of creditor liabilities (20% of the total outstanding at the time of filing) plus the entire $3 billion private equity contribution in 2007 used to fund the buyout.

EFH Generated Enron-sized Costs

Through four years, cumulative EFH bankruptcy-related professional fees hit the $600 million mark (note: by comparison, Enron ultimately cost $700 million) - but may exceed $1 billion when all fees are tallied (including those fees of advisers to the multiple bidders for Oncor). Nearly $200 million alone when to the lead law firm representing EFH. During the first three years of bankruptcy, professionals charged an eye-popping average of $420k per day! So ultimately the fee professional fee investment of $1 billion produced about $19 billion in cash recoveries, that's probably 10 times the fee that a top investment banker would have charged in a more traditional asset sale to produce the equivalent result.

M-III Partners and the Energy Patch

Mr. Meghji is a very busy guy these in the energy patch - just this month a bankruptcy judge approved the appointment of Mohsin Meghji as restructuring chief of Sanchez Energy Corp., overruling junior bondholders' objections that his appointment was tainted by conflicts of interest. Sanchez Energy is currently saddled with about $2.3 billion in debt. Mr. Meghji also served as an independent director at Philadelphia Energy Solutions during 2017-2018 when it elected to utilize bankruptcy proceedings (prior to filing again in 2019).

Energy patch crisis communications experts Meaghan and Jed Repko were also installed recently by the Frontier board - essentially cutting off the flow of new information to investors, including eliminating the Q&A session after the last few earnings calls. The Repko's have worked this approach before in high profile restructurings such as Charter Communications, Edison Mission Energy, Cloud Peak Energy, Energy Partners and Calpine.

Mr. Meghji also served as Chief Restructuring Officer at Sears when it filed for Chapter 11 in October 2018. In less than a year, professionals have billed the Sears Bankruptcy estate for approximately $170 million - a "remarkable 25 percent of the total administrative expenses" in the case, according to court filings. Again, that's closer to $500,000 per day in professional fees, exceeding what was spent daily at EFH. Sears' creditors will likely fair much more poorly than those at EFH; beyond an auction for the aging Craftsman brand, there was no heavy bidding for its "crown jewel" retail network, just a slow grind toward closing all of the remaining Sears stores and litigation against a large hedge fund.

Back of the Envelope Math to Gauge Potential Creditor Outcomes at Frontier

Two Year Horizon for Generating Operating Cash Flow and Realizing Asset Sales

Going forward Frontier could theoretically generate $1.7 billion per year in operating cash - the current run rate per the Nov presentation. My pro-forma uses this as a foundation - even though it relies on some of the overly-optimistic "adjustments and add-backs" I criticized above. Let's assume Frontier can sustain this steady-state operating cash generation level for two more years, and does so while operating in a Chapter 11 bankruptcy, keeping creditors at bay. The Pro-Forma chart below summarizes my analysis of what would be available to creditors from both operations and asset sales at the conclusion of a two year bankruptcy process. The (crude) assumptions I used follow after the chart.

Assumptions behind the Two Year Horizon

I pick a two year Horizon for a few reasons. As demonstrated in Chart A above, within two years about 80% of Frontier's current subscriber revenue that is subject to contract will have essentially burned off. The only revenue-related item that doesn't burn-off during the two years is the CAF subsidy. It is simply not reasonable to believe in the current environment that these existing customers will renew their contacts with Frontier in 2022 or be replaced by new Frontier customers. Furthermore, Frontier just reached a tentative agreement with Communications Workers of America Local 1298 for a new two-year labor contract covering its Connecticut employees (i.e. its headquarters location) that goes through October 2021. Recall, about 83% of Frontiers employees are union members.

Thus after two more years of operating, my conclusion there simply is too little gas (i.e. customer contracts) in the tank left for Frontier to continue running as we know it. And it's not likely its labor contracts can ever be renewed beyond that point. Finally, I assume the extreme cost and hardships imposed by the bankruptcy itself - and the associated toll it will take on its customer service levels - simply won't allow Frontier to survive into a third year.

Triage approach to Network Maintenance and Customer Acquisition

During the next two years, Frontier must maintain bare-bones service levels in its remaining 25 states to avoid regulatory blow back or accelerating customer exodus. This requirement will not permit Frontier to put a dent in its current $3.1 billion annually spend levels on network access and network related expenses. Thus in order to maintain current operating profit during the bankruptcy, I assume severe cuts elsewhere to save cash. First, I assume that Frontier takes the extreme measure of cutting its CAPX in half. By deferring and eliminating maintenance of its infrastructure- Frontier could "save" $150 million per quarter. Of course thisa form of triage and is not sustainable. Further, customers and regulators will view this bone-cutting with disdain and seek penalties if service interruptions spike. Despite this level of bone-cutting, CAPX spending will still eat up $1.2 billion of during the bankruptcy.

Simple logic dictates that the CAPX cuts proposed above and the spreading news of a bankruptcy filing will cause more customers to flee the Frontier system when they can. The status quo is already dismal - currently one hundred thousand Frontier customers consistently burn off each quarter without replacement - and it will get much worse.

Using my triage approach, I assume Frontier cuts massively into its $1.8 billion annual SG&A budget, reducing it 25% of current levels. Most of these cuts will be directed at customer acquisition - new customers are a luxury at this point that Frontier frankly can't afford to on-board or maintain. Further, third party marketing, commissions and customer acquisition spend may be the only component of expense that is variable in the short-run, given how many of Frontiers employees are subject to labor pacts and thus the related payroll is fixed. This 25% SG&A cut will yield $900 million of savings over the term of the bankruptcy.

I assume that the cuts to SG&A can fully offset the operating profit lost from increased customer attrition during the bankruptcy. Thisan aggressive assumption, but one that maintains the steady state $1.7 billion run-rate of operating cash. Again slashing customer acquisition spend in this manner isn't sustainable, but it's a necessary form of triage in order to survive to the end of my assumed two year horizon.

Continuing the math, $3.4 Billion less $1.2 Billion in CAPX leaves $2.2 billion for creditors and bankruptcy administrative costs.

Assumptions about Asset Sales

I assume Frontier files for Chapter 11 just after the planned sale of its Northwest Assets. In my pro forma, I assume this asset sale closes in March 2020 - for net recovery of $1 billion - just prior to Frontier's scheduled April 15, 2020 principal payment of $172mm. This timing would allow the Company to build a small cash hoard and provide some breathing to negotiate a Reorganization Plan or Plan of Liquidation.

I further assume there are no future sales of assets during the bankruptcy proceedings. Presumably this Northwest Operations sale transaction was negotiated first because it was in a relatively desirable geographic market with a willing buyer. As time goes by, Frontiers' remaining infrastructure becomes more and more outdated vis-a-vis its peers. Thisparticularly true as the major wireless carriers are launch 5G nationwide and streaming services dominate the home entertainment landscape. For these and other reasons, I simply don't believe that there are any assets of value that can be monetized in that two year window or that will be left at the cases' conclusion.

Pension Liabilities and other Post-Retirement Benefits

Another major assumption here is that the pension plan does not require material contributions during the bankruptcy. The balance sheet assumes near term obligations of just $39 million - a manageable number. But pension liabilities and other post retirement benefits on Frontier's balance sheet of a long-term nature are $1.64 billion. This declined slightly from the year end 2018 liability balance of $1.75 billion. I have not done any further analysis of the Pension Plan and the company has not provided investors with much to work with in that regard.

Certainly there is a risk that additional layoffs in the bankruptcy will cause the Plan to need bolstering, asfuture contributions will be compromised. Retirees could make earlier claims in larger numbers than previous actuarial projection indicated. Other actuarial assumptions and expected investment returns for the Plan may need to be materially adjusted down the road. To make things simple in my analysis, I simply treated the existing pension liability (see below in the Conclusion) in the same manner as I did the companies secured bondholders and secured lenders (Group A). Thisof course a crude assumption. It could be the case that certain portions of Frontier's pension liability - under ERISA and other pension law - may be senior in priority to that of claims of the secured bondholders. By making the sweeping simplification and thus treating these parties as parri-passu - the obvious conclusion is that a significant portion of the pension liability simply won't be met. This could set up a nasty and expensive battle in the bankruptcy court between the debtor, the plan administrators and the ultimate guarantor -PBGC

Administrative Costs Assumptions - EFH vs Frontier

Using EFH as a guidepost - the Frontier bankruptcy case at $17.5 billion is about half the size of the EFH $42 billion case from a debt-load perspective. Frontier also has somewhat of a simpler legal structure and balance sheet than EFH - with many fewer operating subsidiaries and legal entities. Thistrue even though Frontiers operations are far flung across 29 states versus EFH being a Texas-centric case.

There some very significant distinctions here from the EFH case. In EFH, the crown jewel asset - Oncor - was auctioned off in a bitter dispute during the bankruptcy proceedings and took 3 years to complete. In the Frontier situation, the only asset sale contemplated has already been negotiated with a buyer in 2019. We are simply waiting for the Northwest Operations sale to be approved by regulators and close (possibly).

Another huge difference in the cases is what happens at the end. In EFH, another large regulated utility acquired the Oncor unit, leaving the remaining business lines - with $20 billion of purported value - to be spun-off as a final distribution to creditors. Thus even though the legal entity EFH ceased to exist at the conclusion of the Chapter 11, there is a substantial remaining business (albeit much smaller) after the bankruptcy wrapped up in 2018. The economic value of that spin-off went to the benefit of the creditors. Millions of Texas households continue to obtain their electrical service from the utility (albeit with a new name) that was formerly owned and controlled by its parent, EFH.

By comparison, in the Frontier situation, the triage process is simply a means to maximize recovery during the two year period. The sole objective isto garner cash from the company's 3.8 million paying subscribers while those contracts still exist. If managed properly, whatever cash can be wrung from its subscribers can be made available for creditors, but extreme care is needed to make sure it isn't completely squandered.

At the end of the Frontier bankruptcy process, by contrast, the customer base will simply be gone. A mix of broadband, cellular, cable, satellite and streaming service providers - such as Verizon, ATT, T-Mobile, Sprint, Comcast, Google, Apple TV, CenturyLink, Time Warner, Netflix, Amazon Prime, Dish and others will simply absorb these customers withoutbatting an eye. In sum, post bankruptcy, the Frontier brand and other IP - including the once large customer base - are worthless. The dated physical infrastructure - based on copper and fiber networks - will have scrap value at best. Thus the Frontier bankruptcy is nothing more than a managed liquidation.

For the reasons above I assume the Frontier Chapter 11 will be simpler and quicker - thus it will take only half as long as the EFH case (i.e. it only takes two years from filing to emerging from bankruptcy). That's another reason I picked the two year horizon for my analysis.

I assume the cost of the Frontier case will be $460k/day in professional fees (the half-way point between daily cost of the EFH case and more recent Sears case). At the eye-popping cost of $460k/day, two years worth of professional fees are projected total $330 million.

Conclusions

For simplicity, I also assume that all creditors simply forever "waive" their rights to collect interest expense that accrue during bankruptcy. More than $3 billion dollars of interest expense will build up during a two year bankruptcy trip - the vast majority of that will ultimately be owed to the Unsecured Bondholders. It was more expedient in my analysis to simply eliminate the need to calculate interest expense going forward. My simple logic - the unsecured's are deeply underwater and may get nothing anyways so it's really was not worth the effort. It is true that the expected interest expense number could go up or down if the bankruptcy extends or shortens in duration, but the conclusion is the same.

Hypothetical Creditor Groups - Group A and Group B

Group A - would have a senior priority call on all of $2.869 billion of cash accumulated during the bankruptcy process according to the pro forma. Group A, in order to accommodate an agreed Plan of Reorg./Liquidation, would forego $868.8 million for eventual distribution to Group B. This leaves $2.0 billion (a simple round number) for Group A creditors.

The make up of my two hypothetical creditor groups, Group A and Group B, is as follows:

Recovery for Group A and Group B

Ultimately, this would generate a recovery for Group B members of about $.0728 on each dollar of principal ($868.8 million / $11.927 Billion).

Group A are receiving $2 billion of net proceeds for distribution under my pro forma. Thus Group A creditors - primarily composed of senior secured note holders - would recover $.243 on each dollar of principal, which is $2 Billion / $8.212 Billion. Equity holders would of course get nothing.


Further Notes:

Frontier's Board

My analysis cites various publicly available bankruptcy filing and SEC disclosures. In some cases, the retention of a Frontier board member wasin the role of chief restructuring officers or consultant. In others, they serve as independent directors. These relationships are therefore subject to change, as some of the engagements are short term in nature, or terminate as the businesses liquidate, seek successor management or emerge from bankruptcy. Certain data referenced regarding the EFH bankruptcy are per a publication of Mark Curriden of The Texas Lawbook - Updated 1:43 pm CDT, Thursday, March 29, 2018

Mohsin Meghji is the CEO of restructuring boutique M-III Partners, L.P. M-III partners Managing Director Colin Adams provided financial advisory services in the EFH bankruptcy and was previously a law partner at the law firm which has been retained by both Frontier and EFH. According to Bloomberg Law News, was added to the boards of Fullbeauty Brands Inc. and Shopko Stores Inc. before they filed for Chapter 11, according to court filings. Both retailers had also hired the same bankruptcy counsel that represented EFH and now is engaged by Frontier.

Frontier's Customer Base

The company's paying customer base of 3.8 million is shrinking consistently by 100k per quarter (i.e. 10% of the 3.8 million customer base is burning off per year). Yet the Company continues to use a 4 year average life of a customer in its accounting for customer acquisition costs - an absurdity in the current environment and when the company itself won't last half that long

Based on 2014 year end estimates reported by Verizon, the customers included as part of the announced transaction comprised approximately 1.6 million FiOS internet customers and approximately 1.2 million FiOS video customers. Because services Frontier's services are offered both on a stand-alone basis and in a bundled package, there is overlap in the customer/contract measurement totals and direct comparisons to prior periods are not always apples to apples. Further confusion comes from alternating or even inconsistent use of terminology such as: customers, contracts, accounts, connections and subscribers.

As another baseline for comparison, according to 2018 Frontier annual report, at year end, the company had approximately 4.2 million total customers, of which 3.6 million were broadband subscribers.

Exhibit A

This article was written by

Gary Chodes profile picture
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Gary Chodes was most recently Chairman and CEO of Raiseworks. He is an acknowledged expert on issues impacting a wide range of emerging consumer and commercial finance markets.  Gary was instrumental in building and managing several credit-oriented  and opportunistic funds, including Courthouse Investments, OSR, Blue 66 Capital, American Consumer Lending and Whitestone.   Gary has over 20 years of experience building businesses with significant direct marketing efforts and national distribution networks. Founded in 2011, Raiseworks is the first US marketplace small business lender to focus on institutional investors and is the first to own a FINRA member broker-dealer registered in all fifty states. Prior to Raiseworks Gary was the founder and CEO of Oasis Legal Finance, the largest U.S. provider of financial services to consumers with pending legal claims. Gary was also the co-founder and Chairman of Paylink Payment Plans, a leading payment processing and financial services firm for the vehicle service contract market, which was sold to a private equity firm in 2011. Prior to founding Oasis and Paylink, Gary built several innovative fin-tech businesses. He founded and served as President of Viaticus, a leading provider of liquidity for affluent individuals. He sold Viaticus to CNA , part of Loews Corporation (NYSE:L). Along with several former CNA executives, Gary was instrumental in helping launch one of the first on-line small business-centric origination engines , InsuranceNoodle - which was sold to Willis Group Holdings plc (NYSE:WSH). Gary also serves as CEO of American Consumer Lending, a leading purchaser of peer-to-peer consumer assets from U.S originators, and National Property REIT, a large owner of multi-family housing in in the US. Both are affiliated with publicly-traded BDC Prospect Capital Corporation (NYSE:PSEC). Gary holds a B.S. in Economics from The Wharton School at the University of Pennsylvania and a M.B.A. from the Kellogg School of Management at Northwestern University.
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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.

Additional disclosure: Author's Note: I'll be closely following Frontier in the coming weeks and look forward to publishing more.

Disclosure: I/we have no positions in any Frontier equity, options or debt instruments. I have 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 or financial arrangement with FTR or M-III.

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