Rating agency Standard and Poor’s (S&P) has lowered Frontier Communications Corporation’s (FTR - Analyst Report) rating to junk status but has retained a stable outlook. Stiff competition in the cable business and wireless substitution mainly compelled the rate cut.
S&P has downgraded Frontier’s corporate credit and senior unsecured debt ratings by one notch to BB- from the previous BB rating status. Following the rating downgrade, Frontier’s debt now falls three tiers below the investment grade and could face further rate cuts if it fails to improve its operations.
Earlier in July 2010, Frontier Communications acquired Verizon Communications Inc.'s (VZ) local wireline operations in 14 US states. With this acquisition, Frontier has taken control of over 4.8 million rural landline customers thus trebling in size and has become the largest rural service provider in the United States.
Nevertheless, Frontier’s legacy wireline business remains highly challenged based on competition from wireless and other competitive offerings like Time Warner Cable’s (TWC - Analyst Report) VOIP (voice over internet protocol) service. The access line, which accounts for most of Frontier’s overall revenue continues to decline and has registered an 8% year-over-year drop.
The company is currently integrating Verizon’s assets, which when completed is expected to deliver cost synergies for the company. Significantly, the rating firm suggested that it could raise the telecom company’s ratings if it could decrease its access line loss and increase data services revenue.
Currently, Frontier is focusing on improving its balance sheet position by lowering its financial leverage by means of debt reduction, EBITDA improvement and dividend cuts. In 2012, the company lowered its dividend payout by 47% and recently repaid its 6.25% senior debts Mention the amount of debt repaid from the available cash in hand.
We believe the rating downgrade will hurt the company’s effort to improve its balance sheet position, as access to capital market will likely to become more expensive for the company. We believe Frontier needs to curtail its persistent access line loss to improve its overall business, thus pausing further rate cuts.
Other Stocks Set for Earnings Release
Another related company, Windstream Corporation (WIN - Analyst Report), will report its fourth quarter 2012 results on Feb 18. For Windstream, the current Zacks Consensus Estimate for the fourth quarter stands at 13 cents.
Currently, Frontier Communications carries a Zacks Rank #3 (Hold)