NEW YORK -- Frontier Communications is retreating from a pledge reiterated two weeks ago to trim leverage as the $2 billion purchase of AT&T's Connecticut landline business may push its debt burden to a record.
The company's $850 million of 7.125 percent bonds due January 2023 fell to the lowest level since Oct. 2 after Chief Executive Officer Maggie Wilderotter said Frontier is "very comfortable" with net debt exceeding cash flow by more than three times. That compares with a target of 2.5 that Treasurer Robert Starr projected on Dec. 3.
"They had done a good job convincing bondholders they were committed to delivering, and this is a departure from that," said Mark Stodden, a credit analyst at Moody's Investors Service, which on Tuesday placed Stamford, Conn.-based Frontier's corporate family rating on review for a possible downgrade. "This is a negative transaction."
Frontier may sell $1.9 billion of bonds to help finance the deal, potentially pushing total debt to almost $10 billion from an average of $8.4 billion over the past three years, according to data compiled by Bloomberg. Frontier is preparing to sell more television and Internet access to people in the territory it's acquiring after trailing 12-month revenue dropped to $4.8 billion on Sept. 30 from more than $5 billion in all of 2011.
The company's ratio of net debt to adjusted earnings before interest, taxes, depreciation and amortization fell to 3.33 last quarter from more than 4 in 2010, according to a Nov. 5 third- quarter earnings presentation that included the long-term target. The deal may increase leverage to 3.7 times, based on a 0.4 increase forecast in a presentation Tuesday.
"Frontier feels very comfortable in its ability to manage the modest increase in leverage that would accompany this transaction," Chief Financial Officer John Jureller said in an emailed statement. "The additional scale provided by the to-be-acquired business and resultant free cash flow helps to support both parts of the capital structure -- debt and equity."
Shares of Frontier rose 8.6 percent to $4.78 on Tuesday, bringing the company's market value to $4.78 billion.
While Frontier is prioritizing investments in its network, "all of the residual free cash flow is being dedicated to paying down debt and to reducing leverage," Starr said at the Bank of America-Merrill Lynch Leveraged Finance Conference on Dec. 3, according to a transcript of the event.
A week later, in response to a question about the company's leverage target of 2.5, Jureller said "You're going to see us talk less about that in 2014," according to a Dec. 9 transcript of the UBS Global Media and Communications Conference. "It is something that if we get to there, it could be helpful. But, we don't see an immediate need to be there in short-term," he said.
Investors should now expect Frontier to maintain a leverage ratio of at least 3.1 over the next couple of years, Wilderotter said on Tuesday on a conference call with analysts to discuss the acquisition.