Frontier Communications (NYSE:FTR) continues to face negative pressure as the company tries to improve its balance sheet. Since I last penned an articleabout the company, it has faced downgrades from Moody's and Fitch Ratings. Both these agencies have downgraded Frontier's debt to B2 levels. Moody's has maintained the negative outlook for the company. This was expected as I explained in the article linked above that Moody's was not impressed with the dividend cut. They highlighted that only $300 million worth of savings will not be enough to reduce debt. As this news was expected, it did not affect the stock price. Most of the negatives have been priced in and Frontier Communications is worth the risk for investors with high-risk tolerance at current price levels.
My concerns about the company's subscriber base and weakness in EBITDA has also been highlighted by Moody's in their note regarding the ratings downgrade. Falling EBITDA will take the leverage ratio over 5x, which is not in line with the B1 rating Frontier's debt previously carried. Cash savings of $300 million will help to enhance the liquidity but it will not help the company in reducing its debt. Frontier had further room to borrow $3 billion, according to its debt covenants. The company has issued$1.5 billion in new term loan. Proceeds from this loan will be used to pay some of the debt maturing by 2020. This will also improve the liquidity position of the company as it will push debt maturities back and will offer some breathing space to the company. New debt will not have an impact on leverage as the proceeds will be used to replace the existing debt.
