Frontier Communications: Bankruptcy Looms In 2020 – Seeking Alpha

This year, Frontier Communications (FTR) stock has lost 62% of its value. The decline is attributed to the companys huge debt, its acquisition of the CTF assets from Verizon (VZ), its dividend issues, and growth prospects in its operating segments.

In the past two months, I have written about the company and its need to cut or eliminate its dividend. Early this month, the company announced a 62% dividend cut that will see it save $300 million this year and $400 million in 2018.

In this article, I will explain the reasons I believe that Frontier will declare bankruptcy in either 2020 or 2021.

In the past five years, Frontier invested $24.2 billion in capital expenditure. The company used this money for acquisitions and infrastructure upgrade. In 2014, it paid $2.2 billion for wireline assets from AT&T (T). The following year, it spent $11 billion to acquire Verizons (VZ) operations in California, Florida, and Texas (CTF).

In that period, it issued debts of about $12.5 billion. This money was used to pay existing debts, pay dividends, and fund the acquisitions. Unfortunately, these acquisitions are not working. In some cases, it has lost customers as a result of the acquisitions.

In total, Frontier has more than $17.5 billion in debt and $371 million in cash at hand. As I will explain below, the company will not be able to honor its covenants past 2020.

To better explain this, I will first look at how the company makes money. Its source of income are data and internet services, voice, and video services. In voice, the company provides data-based VoIP, long distance and voice messaging services, to residential and business customers. This segment has been declining as more people and businesses turned to wireless communications. In the video segment, the company provides television services through its Vantage brand and its partnership with DISH (DISH). This segment has also been declining as more people move to newer forms of watching TV. In the past two decades, the data and internet services segment has grown as more people started using the internet. However, this segment will not provide much growth in future since most people and businesses are already connected to the internet.

Back to the debt. The companys long-term debt maturities are shown in the chart below.

Source: FTR

In 2018 and 2019, the company will be required to pay more than $1.5 billion. The company can comfortably pay this amount as the management said in the recent earnings call:

We have relatively low debt maturities over the next two years, with $733 million due 2018, the majority of which is in Q4 2018 and $818 million due 2019. We intend to issue secured debt in the second quarter of 2017, subject to market conditions, and we will use the proceeds, existing liquidity, ongoing cash flow from operations, and the increased cash on hand from the reduction of the dividend to accelerate deleveraging, reduce interest expense, and increase free cash flow.

The company will hit a wall in 2020 when it will be expected to pay $2.4 billion. In 2021 and 2022, it will be required to pay $2.5 billion and $2.6 billion respectively. The figures are much higher when you include the interest and other obligations which are shown below.

Source: FTR 10-K

In 2016, the company had revenues of $8.86 billion and a net loss of $262 million. This means that even if it manages to increase its revenues and reducing its expenses, it will not have enough runway to generate cash to service the debt past 2020.

At that time, it will either issue debt or sell assets. The first option will be difficult because of its current debt and the weakness of its operating segments. In November last year, Moodys downgraded FTR to B1 rating. In March, it reaffirmed this rating. This means that it will be difficult for FTR to raise more debt. Asset sales will not be a viable option either. In 2020, it will be difficult for the company to sell its wireline business which will be obsolete within a short period.

Early this month, the company announced that it would reduce its dividend. This is an action I have called for in my past articles. The company expects to save about $1.5 billion. However, this action will not be enough in the long-term.

Bottom-line

Frontier operates in an industry that is changing very fast. Its video services are being disrupted by streaming services offered by Netflix, Hulu, and YouTube. Its voice services have been overtaken by wireless mediums while its data and internet services have limited room for growth. The company can afford to pay its near-term debt maturities. However, in 2020, 2021, and 2022, the company will be required to pay more than $7.5 billion an amount it might not manage to raise. At that time, I believe the company might be forced to file for bankruptcy.

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.

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Frontier Communications: Bankruptcy Looms In 2020 - Seeking Alpha