Frontier Communications (NYSE:FTR) is a provider of local telephone service, broadband internet, and other communications services in primarily rural areas of the United States. It has been growing itself recently by acquiring assets from other telecommunications companies, the most recent being the acquisition of certain broadband internet and other wired customers for the former California, Texas, and Florida (CTF) operations of Verizon (NYSE:VZ). In order to complete this transaction, Frontier took on a large amount of high-interest debt. Subsequent to the CTF transaction, there was significant loss of customers leading to dramatic reductions in customer counts, credit rating reductions, a dividend reduction, an announced reverse split, and a huge drop in the stock price.
These events have been covered in some detail in previous articles as well as numerous commentaries. The purpose of this article is to follow up on a specific aspect of the FTR story, relating to the recent $1.5 billion secured loan. Namely, how does this new loan impact the capital structure of Frontier, with a particular impact on the credit risk of the unsecured bonds? After working through a bankruptcy scenario and evaluating possible recovery, I conclude that the secured loan should have had no more than a 1.5% impact on unsecured bond prices.