A four-player chess game
Back in June 2019, hedge fund Aurelius wrote a letter to Frontier Communications (FTR) to pursue an out-of-court debt exchange.
On October 2019 Robert Citrone recommended the company file for Chapter 11 “sooner than later”.
In November 2019 a different group of creditors holding Frontier’s debt hired a law firm to ensure their interests were represented in the troubled telecom company’s restructuring negotiations.
Just in case three different creditor groups, all of them pursuing different targets, are not enough to confuse investors about the possible outcome for the company, Frontier’s largest union recently entered the scene, too.
According to comments made in February 2020, the union expects FTR to adopt a restructuring plan that converts about 80% of the company’s $12 billion of unsecured debt should into equity - inside information or wishful thinking?
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In such a complex situation (understatement for complete mess), we are not surprised that Frontier Communications has been signaling its intention to file for Chapter 11 ahead of its large March 15th interest payments, as reported by Bloomberg.
A court supervised process may be the best way, or the only option left to the company, to deal properly with a restructuring, that involves some of the most litigious counterparts.
Debt and equity investors in Frontier communication may have to wait no longer than the ides of March to know the outcome for their investment.
The Ides of March was a day in the Roman calendar that corresponds to March 15th.
If you have ever heard of it, it's probably thanks to William Shakespeare - it was on that day that Caesar was killed.
However, it was notable for the Romans as a deadline for settling debts - a perfect description for FTR restructuring efforts.
The proverbial canary in the coal mine.
Frontier’s 8.5% 4/15/2020 bonds may represent the proverbial canary in the coal mine.
Their current price is telling us that a Chapter 11 filing before they are due in April is very likely.
However, some investors may also consider them as a decent bet on the company not being capable to put together a pre-packed bankruptcy before mid April, or having some obstacles to a filing in the next few weeks - say the need to wait for the closing of the sale of its assets in Washington, Oregon, Idaho, and Montana to WaveDivision Capital LLC and Searchlight Capital Partners LLC, or other legal considerations.
If you embrace this vision, the upside may be a double, in a relatively short period of time, while the downside is represented by the potential recovery of the bonds in case of a filing - which may also mean seeing a debt instrument converted into equity of the new, restructured company.
If you like sleeping well at night, you may prefer to avoid both taking a bet on the April bonds and the equity, which might be wiped out in a Chapter 11 filing - or highly diluted, which is a very similar outcome.
As we believe a filing ahead of Frontier’s March 15th $ 330 million interest payment would be the most rational behavior for the company, we suggest to take a wait and see approach.
While we may see a very volatile trading in the first days after the filing, a restructuring process made through a Chapter 11 usually offers patient investors less risky entry points over the longer term, when the dust settles and the outcome of the company’s restructuring becomes more decipherable.
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