OREANDA-NEWS. Fitch Ratings has affirmed the Issuer Default Rating (IDR) and long-term issue ratings of Frontier Communications Corporation (Frontier; NYSE: FTR) and assigned Recovery Ratings to the debt issuances as follows:

--IDR at 'BB';
--Senior unsecured $750 million revolving credit facility due 2018 at 'BB/RR4';
--Senior unsecured notes and debentures at 'BB/RR4'.

The Rating Watch Negative is removed from all ratings, and the Rating Outlook is Negative.

In addition, Fitch has revised the ratings of other Frontier subsidiaries and assigned Recovery Ratings as listed at the end of this release.

The Rating Outlook is Negative, as Fitch does not expect Frontier to reach Fitch's net leverage threshold of 3.75x for the current rating until approximately the end of 2017. The Negative Watch stemmed 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 was announced in February 2015 and is expected to close at the end of March 2016. All necessary regulatory approvals have been obtained and Frontier is completing necessary system conversions, as planned, before the close of the transaction.

Frontier has raised or entered into bank financing arrangements for all the financing necessary to close the transaction. In September 2015, Frontier raised the remaining $6.6 billion needed to close the transaction, after taking into account previous debt and equity financings. In August 2015, Frontier entered into an agreement for a $1.5 billion senior secured delayed draw term loan. The proceeds from a common equity and mandatory convertible preferred offerings were raised in June 2015 and net proceeds total approximately $2.7 billion, including proceeds from the exercise of overallotments. The preferred offering was given 100% equity credit.

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. At this time, Fitch has not upgraded the revolver or rated the senior secured, delayed draw term loan but anticipates upgrading the revolver, which becomes secured, to 'BB+/RR1', and assigning a 'BB+/RR1' rating to the term loan at the close of the transaction.

There is no rating action at this time on the debt or IDR of the three Verizon subsidiaries that are being acquired by Frontier, which are rated as follows:

Verizon California
Verizon Florida
--IDR 'A-';
--Senior unsecured 'A-'.

GTE Southwest
--IDR 'A-';
--First mortgage bonds 'A-'.

Fitch had previously maintained these subsidiaries on Rating Watch Negative in December 2015 when Verizon was reviewed. Fitch anticipates downgrading the IDR of these issuers to 'BB' and downgrading the senior unsecured and mortgage bonds to 'BB+/RR1' at the time of the close of the transaction.

In addition,

KEY RATING DRIVERS
Leverage Elevated for Rating: Excluding $6.6 billion of senior notes issued to fund the Verizon transaction, leverage declined to 4.1x at Sept. 30, 2015 from 4.5x the previous year (leverage at 3Q'14 included $2 billion of debt issued to fund the October 2014 close of the Connecticut acquisition). However, leverage remains slightly elevated compared to expectations of leverage maintained under 4x for the current rating category. Frontier will need additional time to deleverage to incorporate the Verizon assets into its operations. Fitch estimates Frontier's pro forma gross leverage could be 4.5x at the close of the transaction (4.3x net leverage).

Acquisitions Improve Scale: Fitch believes the acquisition of the Connecticut operations in late 2014 and the pending 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: During the first three quarters of the year, Frontier's revenues have been relatively stable, with a slight downward bias. Pro forma revenues for the Verizon assets through the first two quarters demonstrate similar results. A key issue for Frontier over time will continue to be retaining and attracting customers.

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

--In 2016, Frontier's consolidated revenues are expected to rise to approximately $10 billion owing to the expected close of the Verizon line acquisition at the end of March 2016;

--2016 EBITDA margins are in the low 40 percent range. Fitch has conservatively assumed synergies for the first year following the close of the transaction will be $500 million, slightly less than the expectations by Frontier of day one synergies of $525 million. While there is some risk that costs could vary around this metric, the synergies represent costs allocated to these properties by Verizon that will no longer occur as operations are flash cut to Frontier's systems. Frontier has achieved its synergy targets in previous recent transactions;

--Capex is expected to be in the range of $1.6 billion to $1.7 billion in 2016. Fitch's assumptions reflect capital spending related to operations in the range of 12% to 12.5% of revenues for legacy Frontier and the Verizon properties, with additional capital spending for CAF II and integration;

--Other than the $1.5 billion drawn on the senior secured term loan to complete the Verizon transaction, Fitch forecasts only a modest debt issuance in 2017 to maintain cash balances of approximately $500 million during the 2016 to 2018 period.

RATING SENSITIVITIES
The Outlook could be revised to Stable if in Fitch's view Frontier will be able to sustain post-transaction net leverage at or below 3.75x. Fitch has revised the net leverage threshold down to 3.75x from 4.0x owing to the continued secular challenges faced by the wireline industry. Business services revenue has been slower than Fitch's previously expected levels of GDP-type growth owing to factors such as aggressive cable operator competition and slow economic growth.

The rating could be downgraded if net leverage is expected to be above 3.75x due to a number of factors, including lower synergy realization or assumptions, and competitive pressures on EBITDA. Revenue pressures in the wireline industry have moderated, but a return to mid-single digit declines in revenue, while not expected, would lead to a negative action.

LIQUIDITY
Manageable Maturities: Excluding the draw on the senior secured term loan related to 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 amount to approximately $384 million and $646 million during 2016 and 2017, respectively.

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 Sept. 30, 2015, Frontier had $1.011 billion in balance sheet cash, excluding $8.44 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: 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.

FULL LIST OF RATING ACTIONS

Fitch has removed the following ratings from Rating Watch Negative and affirmed and assigned Recovery Ratings as follows:

Frontier Communications Corporation
--IDR at 'BB';
--Senior unsecured $750 million revolving credit facility due 2018 at 'BB/RR4';
--Senior unsecured notes and debentures at 'BB/RR4'.

Frontier North Inc.
--IDR at 'BB';
--$200 million unsecured notes due 2028 at 'BB+/RR1'.

Frontier West Virginia
--IDR at 'BB';
--$50 million private placement notes due 2029 at 'BB+/RR1'.