2027 Secured Notes Core Analysis
In connection with its emergence from chapter 11, Frontier Communications is issuing $1.15 billion of first lien notes due 2027 (the “2027 Secured Notes”) with proceeds to be used, together with proceeds from a new term loan facility and cash on hand, to repay the company’s prepetition first lien notes. Continue reading for the Covenants by Reorg team's update on the Frontier Communications chapter 11 filing emergence, and request a trial to access our coverage of hundreds of other credits.
Frontier’s capital structure as of June 30, adjusted for the issuance of the 2027 Secured Notes and further adjusted for the equitization of the company’s prepetition unsecured notes and the issuance of $750 million of unsecured take-back debt, is illustrated below for reference:
Notable issues under the 2027 Secured Notes include the following:
- Accessing leverage-based restricted payment baskets - Accessing leverage-based restricted payments and leverage-based investments baskets, as well as accessing the EBITDA component of the 2027 Secured Notes’ builder basket, require that Frontier meet specified first lien leverage tests. These tests are almost always total leverage tests so as to account for all outstanding debt, not just first lien and other secured debt (builder baskets may require meeting a 2x fixed charge coverage ratio instead).
On the effective date, Frontier will have about $3.2 billion of junior lien and unsecured debt outstanding. Because access is conditioned on a first lien leverage test, none of this debt will affect the company’s ability to access these baskets.
- EBITDA-based builder basket - The 2027 Secured Notes’ builder basket provides capacity based on LTM EBITDA (from the first full quarter after the conversion date, which is the date on which the conditions for exiting chapter 11 have been met)), less 1.4x fixed charges, plus the greater of $100 million and 3.5% of EBITDA.; Specifically, the basket is based on:
“an amount equal to the Company’s LTM EBITDA for the period (treated as one accounting period) from the first day of the first fiscal quarter subsequent to the Conversion Date to the end of the most recent fiscal quarter ending prior to the date of such Restricted Payment for which consolidated financial statements are available less 1.4x times the Company’s fixed charges.”
Most builder baskets that are based on EBITDA less fixed charges typically accumulate capacity based on cumulative EBITDA from issuance. The 2027 Secured Notes’ builder basket builds based on LTM EBITDA, which arguably includes EBITDA generated prior to issuance that could significantly increase capacity under the basket. That increased capacity, however, will likely be at least partially offset by LTM fixed charges.
Interestingly, the builder basket under the company’s prepetition first lien notes that are being repaid with proceeds from the 2027 Secured Notes was based on:
“Cumulative Consolidated EBITDA from and after October 1, 2015 to the most recently ended fiscal quarter for which internal financial statements are available preceding the date of the proposed action … minus (y) 1.4 times Cumulative Interest Expense plus (without duplication).”
- Utilization of asset sale proceeds - An exception to the definition of “Asset Dispositions” under the 2027 Secured Notes likely permits asset sale proceeds to be used to fund restricted payments instead of being used to repay outstanding debt or to reinvest in the business.
In addition, Frontier can use asset sale proceeds to purchase the 2027 Secured Notes in the open market at below par prices.
- Guarantee, lien releases, lien subordination - Amendments that release guarantees likely only require consent from a majority of noteholders.
Amendments that release the liens on collateral or subordinated noteholders’ liens require consent from 66.66% of noteholders.
- Conversion date increased capacity - The negative covenant package is structured to provide certain capacities at any time prior to the conversion date and increased capacities following the conversion date (similar to the basket copied below). Although there is no explicit restriction that would prohibit Frontier from incurring amounts permitted prior to the conversion period in addition to amounts permitted following the conversion date, we have assumed that the baskets are, effectively, one basket.
“Indebtedness of the Company or any of the Guarantors in an aggregate outstanding principal amount which … will not exceed (x) prior to the Conversion Date, $500 million and (y) after the Conversion Date, the greater of (i) $1 billion and (ii) 35% of LTM EBITDA.”
The following chart illustrates the increased capacity permitted under the 2027 Secured Notes following the conversion date:
A comprehensive report on the 2027 Secured Notes is available HERE.