OREANDA-NEWS. Fitch Ratings has assigned a 'BB' rating to Frontier Communications Corporation's (Frontier) (NYSE:FTR) \\$6.6 billion offering of senior unsecured notes. The notes consist of three tranches: \\$1 billion of 8.875% senior unsecured notes due 2020, \\$2 billion of 10.5% senior unsecured notes due 2022 and \\$3.6 billion of 11% senior unsecured notes due 2025. The issue ratings of the \\$6.6 billion offering are also on Rating Watch Negative. Frontier's Issuer Default Rating (IDR) is 'BB' and is on Rating Watch Negative.

The Negative Watch arises from Frontier's plans to acquire certain wireline operations in California, Texas and Florida from Verizon Communications Inc. for approximately \\$10.54 billion, including \\$600 million of assumed debt. The transaction is expected to close at the end of March 2016, after all necessary regulatory approvals are obtained.

The current \\$6.6 billion offering provides the remaining financing needed to close the transaction, after taking into account previous debt and equity financing. Prior debt financing consists of a previous agreement for a \\$1.5 billion secured delayed draw term loan. The proceeds from an equity offering were raised in June and consist of a total of \\$2.75 billion of common stock and mandatory convertible preferred stock.

Upon the draw of the senior secured term loan, the company's existing \\$750 million unsecured revolving credit facility and unsecured term loans will become equally and ratably secured with the delayed draw term loan. Combined with other secured debt, the pledges will introduce approximately \\$2.3 billion of secured debt into the capital structure, excluding potential drawings on the currently undrawn revolving credit facility.

In reviewing the transaction, Fitch will focus on the financing of the transaction, a review of potential synergies, and the outcome of the regulatory review process, among other factors.

Fitch anticipates resolving the Negative Watch around the time of the anticipated closing of the Verizon transaction in early 2016.

KEY RATING DRIVERS

Leverage Increase: At June 30, 2015, Frontier's gross leverage was 4.3x (versus 3.7x on June 30, 2014). The June 30, 2015 metric is elevated as it includes debt issued to fund the October 2014 close of the AT&T line acquisition for approximately \\$2 billion, but only the portion of EBITDA since the close of the transaction.

Acquisitions Improve Scale: Fitch believes the acquisition of the Connecticut operations and the proposed acquisition of the Verizon properties will increase the scale of Frontier, and lead to improved free cash flow (FCF, defined as net cash provided by operating activities less capital spending and dividends) over time. In Fitch's view, the two acquisitions will not require material additional capital spending given past network upgrades by AT&T and Verizon.

Revenue Pressures Moderating: In the second quarter of 2015, Frontier reported sequential growth in business and residential customer revenue and the stabilization of results in Connecticut, as the company is managing through competitive headwinds. The company continues to face effects on revenues of wireless backhaul migration, the effect of reforms to intercarrier compensation and secular voice revenue declines. A key issue for Frontier over time will be retaining and attracting customers.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

--In 2015, Frontier's revenues are expected to decline in the low single digits pro forma for the October 2014 AT&T transaction;
--2015 EBITDA margins are in the low to mid 40 percent range;
--Capex is expected to be in the range of \\$700 million to \\$750 million in 2015.

RATING SENSITIVITIES

The rating could be affirmed at the current level if in Fitch's view Frontier will be able to sustain post-transaction net leverage below 4x.

The rating could be downgraded if net leverage is expected to be above 4x due to a number of factors, including lower synergy realization or assumptions, and competitive pressures on EBITDA.

LIQUIDITY

Manageable Maturities: Excluding the Verizon transaction financing, Frontier is not expected to need to access the capital markets to refinance maturing debt through at least 2016. Existing principal repayments of approximately \\$432 million over 2015 and 2016 can be managed with cash expected to be on the balance sheet plus FCF.

Liquidity Solid: Supporting the rating is Frontier's ample liquidity, which is derived from its cash balances and its \\$750 million revolving credit facility. At June 30, 2015, Frontier had \\$1.246 billion in balance sheet cash, excluding \\$1.84 billion of restricted cash which will be released upon the closing of the Verizon transaction to fund a portion of the purchase price.

Credit Facility and Debt Maturities: The \\$750 million senior unsecured revolving credit facility is in place until May 2018. The facility is available for general corporate purposes but may not be used to fund dividend payments. The revolving credit facility will become secured when the company draws on its \\$1.5 billion delayed draw secured term loan facility upon the funding of the Verizon transaction. The main financial covenant in the revolving credit facility requires the maintenance of a net debt-to-EBITDA level of 4.5x or less during the entire period. Net debt is defined as total debt less cash exceeding \\$50 million.