Frontier gets downgraded rating from Fitch despite stable outlook

Healthcare costs rising
Fitch downgraded Frontier's rating, but is encouraged by the service provider's efforts to turn around its subscriber churn and implement cost controls. (Image: Getty/jackaldu)

Frontier’s rating from Fitch has been downgraded to B, reflecting the rating company’s forecast that is lower than its previous expectations as well as a challenging environment for wireline providers.

Still, Fitch said that Frontier's outlook is stable, with an improvement in revenue trendthough still negativepredicted for this year. The rating company expects modest improvements for Frontier’s revenue in 2019 and after.

This outlook also takes into consideration Frontier’s efforts to lower churn and ongoing cost control efforts, which will lead to $350 million in run-rate savings by the middle of the year. Additionally, Fitch’s outlook is supported by Frontier’s decision to suspend its dividend and the recently announced offer to address maturities over 2020-2023.

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RELATED: Frontier takes another step toward CTF growth, but legacy challenges remain

Earlier this year, Frontier suspended its $2.40 per share annual dividend, allowing for a reduction in annual dividend payments by approximately $250 million including the effect of the conversion of Frontier's preferred stock during the second quarter of 2018. Besides the dividend reduction, Fitch says Frontier's enhanced scale from the Verizon acquisition should lead to improved free cash flow over time to provide additional liquidity for debt reduction.

For its own part, Frontier is seeing some improvement in customer churn in its California, Texas and Florida (CTF) Fios markets, while the legacy areas remain a challenge.

During its fourth-quarter call, the service provider reported that in the consumer segment it lost 2,000 Fios broadband customers. This is an improvement over the 11,000 it lost in the third quarter and 60,000 during the same period a year ago following its acquisition of Verizon’s wireline properties in the CTF territories.

However, in the legacy consumer business segment, where the telco lost over 44,000 broadband and 3,000 traditional video customers.

Frontier said in 2018 the service provider will continue to drive penetration in its copper markets including low density markets associated with CAF-II. Additionally, Frontier plans to improve customer retention, while enhancing the customer experience and aligning its cost structure.

“The Outlook also incorporates lower churn, and successful cost control efforts, leading to annualized run-rate savings of $350 million by mid-2018,” Fitch said. “The boost to FCF from the suspension of the dividend, combined with the recently announced tender offer (to be financed by the second-lien notes) to address maturities over 2020-2023 are also supportive of the Outlook.”

Likewise, Frontier is making similar moves to improve the results in its commercial business segment. Leveraging its portfolio of fiber-connected buildings and towers, Frontier is developing initiatives to improve customer experience, increasing sales productivity and providing quicker installations.

Looking toward the rest of 2018, the key focus for Frontier will be on controlling costs. The service provider indicated that annualized cost savings from its programs reached $190 million at the end of 2017, and it expects to achieve an annualized rate of $350 million by mid-2018.

But even with these improvements, Fitch said Frontier needs to continue to make progress on improving its revenue trajectory” and expects the telco’s “revenue trends will slowly improve from a deficit in the low single digits in 2018 to flat revenue growth by the end of the forecast horizon.”