OREANDA-NEWS. Fitch Ratings has affirmed Frontier Communications Corporation's (Frontier; NYSE: FTR) Issuer Default Rating (IDR) at 'BB' following the close of the acquisition of certain wireline properties from Verizon Communications Inc. (Verizon) on April 1, 2016. The Rating Outlook for Frontier and its subsidiaries remains Negative.

In addition to the affirmation of the IDR, Fitch takes the following actions:

Frontier Communications Corp.
--IDR affirmed at 'BB';
--The $1.5 billion senior secured delayed draw term loan due 2021 rated 'BB+/RR2';
--The $750 million revolving credit facility due 2018 upgraded to 'BB+/RR2' from 'BB/RR4' due to a security pledge granted on the initial draw of the $1.5 billion senior secured delayed draw term loan;
--Senior unsecured notes and debentures affirmed at 'BB/RR4'.

Upon the initial draw of the $1.5 billion senior secured term loan, Frontier's $750 million unsecured revolving credit facility and other unsecured term loans became equally and ratably secured with the delayed draw term loan. Combined with other secured debt, the pledges introduced approximately $2.3 billion of secured debt into the capital structure, excluding potential drawings on the currently undrawn revolving credit facility. Frontier also has approximately $850 million of operating telephone subsidiary debt (of this amount, $100 million is secured, the remainder is unsecured) structurally senior to all parent debt.

The RR2 recovery rating assigned to the secured revolver and senior secured delayed draw term loan reflects the potential limitations in value of Frontier North as collateral for the secured revolver and secured term loans, including potential revolver drawings (per Fitch's approach), if cash flows are stressed. In addition, Frontier North has $200 million of unsecured debt that is structurally senior to the equity pledge providing security to the parent secured debt.

The following rating actions have been taken on the three former Verizon subsidiaries acquired by Frontier as follows:

Verizon California
Verizon Florida
--IDR downgraded to 'BB' from 'A-';
--Senior unsecured debt downgraded to 'BB+/RR1' from 'A-'.

GTE Southwest
--IDR downgraded to 'BB' from 'A-';
--First mortgage bonds downgraded to 'BB+/RR1' from 'A-'.

The Rating Watch Negative has been removed from these three subsidiaries. The Rating Outlook is Negative.

Frontier's Rating Outlook is Negative, as Fitch does not expect Frontier to reach Fitch's net leverage threshold of 3.75x for the current rating until approximately the end of 2017.

A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Improved Scale: On April 1, 2016, Frontier acquired certain wireline operations in California, Texas and Florida from Verizon Communications Inc. for approximately $10.54 billion, including $600 million of assumed debt. The acquisition materially increases Frontier's scale, as Fitch expects Frontier's consolidated revenues in 2016 to rise to approximately $10 billion from $5.6 billion in 2015.

Strengthening FCF: Frontier expects costs to be reduced by more than $600 million in the first year after close (Fitch has assumed $500 million), with savings rising to $700 million annually by the third year. Fitch believes the acquisition of the Verizon properties will lead to improved free cash flow (FCF, defined as net cash provided by operating activities less capital spending and dividends) over time. The acquisition is not expected to require material additional capital spending given past network upgrades by Verizon.

Leverage Elevated for Rating: Excluding $6.6 billion of senior unsecured notes issued in 2015 to fund the Verizon transaction, gross leverage was 4.1x at Dec. 31, 2015. Frontier will need additional time to deleverage, after incorporating the Verizon assets into its operations, and Fitch estimates leverage will be below 3.75x by the end of 2017.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:

--In 2016, Frontier's consolidated revenues are expected to rise to approximately $10 billion owing to the expected close of the Verizon line acquisition on April 1;

--2016 EBITDA margins are in the low 40 percent range. Fitch has conservatively assumed synergies for the first year following the close of the transaction will be $500 million, slightly less than the expectations by Frontier of day one synergies of more than $600 million. While there is some risk that costs could vary around this metric, the synergies represent costs allocated to these properties by Verizon that will no longer occur as operations are flash cut to Frontier's systems. Frontier has achieved its synergy targets in previous recent transactions;

--Capex is expected to be in the range of $1.6 billion to $1.7 billion in 2016. Fitch's assumptions reflect capital spending related to operations in the range of 12% to 12.5% of revenues for legacy Frontier and the Verizon properties, with additional capital spending for CAF II and integration;

--Other than the $1.5 billion drawn on the senior secured term loan to complete the Verizon transaction, Fitch forecasts only a modest debt issuance in 2017 to maintain cash balances of approximately $500 million during the 2016 to 2018 period.

RATING SENSITIVITIES

The Outlook could be revised to Stable if in Fitch's view Frontier is able to sustain post-transaction net leverage at or below 3.75x. In early 2016, Fitch revised the net leverage threshold down to 3.75x from 4.0x owing to the continued secular challenges faced by the wireline industry. Business services revenue has been slower than Fitch's previously expected levels of GDP-type growth owing to factors such as aggressive cable operator competition and slow economic growth.

The rating could be downgraded if net leverage rises above 3.75x due to a number of factors, including lower synergy realization or assumptions, and competitive pressures on EBITDA. Revenue pressures in the wireline industry have moderated, but a return to mid-single digit declines in revenue, while not expected, would lead to a negative action.

LIQUIDITY

Manageable Maturities: Excluding the draw on the senior secured term loan related to the Verizon transaction financing, Frontier is not expected to need to access the capital markets to refinance maturing debt through at least 2016. Existing principal repayments amount to approximately $384 million and $646 million during 2016 and 2017, respectively.

Liquidity Solid: Supporting the rating is Frontier's ample liquidity, which is derived from its cash balances and its $750 million revolving credit facility. At Dec. 31, Frontier had $936 million in balance sheet cash, excluding $8.44 billion of restricted cash which was released upon the closing of the Verizon transaction to fund a portion of the purchase price.

Credit Facility: The $750 million senior secured revolving credit facility is in place until May 2018. The facility is available for general corporate purposes but may not be used to fund dividend payments. The main financial covenant in Frontier's secured facilities requires the maintenance of a net debt-to-EBITDA level of 4.5x or less during the entire period. Net debt is defined as total debt less cash exceeding $50 million.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the ratings and maintained the Negative Outlook as follows:

Frontier Communications Corporation
--IDR at 'BB';
--Senior unsecured notes and debentures at 'BB/RR4'.

Frontier North Inc.
--IDR at 'BB';
--$200 million unsecured notes due 2028 at 'BB+/RR1'.

Frontier West Virginia
--IDR at 'BB';
--$50 million private placement notes due 2029 at 'BB+/RR1'.

In addition, Fitch has taken the following actions:

Frontier Communications Corp.
--The $1.5 billion senior secured delayed draw term loan due 2021 rated 'BB+/RR2';
--The $750 million revolving credit facility due 2018 has been upgraded to 'BB+/RR2' from 'BB/RR4' due to a security pledge granted on the initial draw of the $1.5 billion senior secured delayed draw term loan.

Verizon California
Verizon Florida
--IDR downgraded to 'BB' from 'A-';
--Senior unsecured debentures downgraded to 'BB+/RR1' from 'A-'.

GTE Southwest
--IDR downgraded to 'BB' from 'A-';
--First mortgage bonds downgraded to 'BB+/RR1' from 'A-'.

The Rating Watch Negative has been removed from these three subsidiaries. The Rating Outlook is Negative.