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The Final Frontier: Phone Company Plans Bankruptcy Reorganization by March

Phillip Dampier January 20, 2020 Consumer News, Frontier 2 Comments

Frontier Communications will file Chapter 11 bankruptcy by March, according to a report by Bloomberg News citing unnamed sources, leading to a major reorganization of a struggling phone company that has been losing customers for years.

Bernie Han, Frontier’s new CEO, reportedly met with creditors and Wall Street advisors late last week to negotiate a bankruptcy filing and proposed turnaround plan to be unveiled before Frontier faces a repayment deadline of $356 million in debt on March 15.

If creditors agree, Frontier would continue operations after filing bankruptcy and renegotiate its debts, while potentially jettisoning retiree pension benefits, stiffing shareholders, and winning the freedom to exit certain long term contractual agreements related to its legacy properties and services.

Frontier serves around 3.5 million broadband customers in 29 states, providing service mostly to rural communities ignored by former Bell Operating Companies and in acquired service areas once controlled by Verizon or AT&T. Frontier’s acquisitions have contributed to the company’s $17+ billion in debt and have ultimately not met expectations. Many Frontier legacy customers have fled to other providers because of poor or inadequate service and a lack of network upgrades to offer acceptable internet service. Frontier has largely avoided undertaking major fiber optic upgrades in its legacy service territories, where the company still sells slow DSL service over a deteriorating copper wire network that is often decades old.

Most of Frontier’s fiber-to-the-home territories were acquired by the company, hoping such acquisitions would deliver a much-needed revenue boost. But some analysts say Frontier overpaid to acquire those service areas, and in several cases botched a conversion to Frontier’s billing and service platform, alienating customers.

The company’s stock has been in free fall for months, starting its steep decline after abandoning a popular dividend payout plan. As of this afternoon, shares are priced below 65 cents.

To stabilize the business, Frontier has entertained selling off portions of its network. In May 2019, Frontier announced it was selling 350,000 of its customers in the Pacific Northwest states of Washington, Oregon, Montana and Idaho to raise $1.35 billion to pay down its debts, but that was not enough to appease investors. Many believe former CEO Dan McCarthy was forced out of the company late last year after failing to improve the business. Frontier’s newest CEO has apparently decided reorganization through bankruptcy is now the best last resort.

Such news pleases activist investment funds including Elliot Management, which have pushed for reorganization for nearly a year. Elliot has been very vocal, demanding better results from several large telecom companies, including AT&T and Windstream. Elliott Management and Franklin Resources now hold nearly 50 percent of Frontier’s bonds. Another group of creditors includes GoldenTree Asset Management. The activist investors have been primarily fighting over the $5.8 billion in high-coupon debt bonds Frontier issued to cover its acquisition of former Verizon customers in California, Texas, and Florida. Frontier met fierce investor objections after considering refinancing that costly debt, because bondholders feared that would put them last in line to recoup their investments if Frontier went bankrupt.

A bankruptcy would not immediately impact Frontier’s customers and operations would continue. But Frontier would likely stall upgrades and future spending until the company exits bankruptcy. Some customers may also have to wait for refunds, at least initially, subject to court approval. Retirees and employees may also eventually face changes to their benefits packages.

For Frontier to be successful, the company will have to shed debt and begin making much larger investments to modernize its network to compete for lucrative broadband customers. It will also have to improve its image with better customer and repair service and fewer “gotcha” billing policies and fine print.

Frontier Communications Warns It May Declare Bankruptcy In Early 2020

Phillip Dampier November 13, 2019 Consumer News, Frontier 147 Comments

After years of customer losses and a stifling debt of $17.5 billion, Frontier Communications was warned investors it may be forced to declare bankruptcy reorganization to protect its assets from creditors that are growing impatient with the phone company.

Analysts suggest Frontier is considering a Chapter 11 bankruptcy filing as early as the first quarter of 2020 as part of a sweeping reorganization of the company that will also include replacing its top management.

Bloomberg News reports corporate advisers have already begun looking for a replacement of CEO Dan McCarthy, a long term Frontier executive that began a career at Rochester Telephone Corporation before it was acquired by Frontier. McCarthy replaced former Frontier CEO Maggie Wilderotter in 2015. Since Wilderotter’s departure, Frontier’s share price has spiraled downwards and customers are leaving in droves.

McCarthy

Over 71,000 Frontier customers disconnected service in the third quarter of 2019 alone, the biggest percentage of customer losses of any major residential telecom company in the United States.

Frontier executives have repeatedly blamed the ongoing disconnection of traditional landline service for its declining results, but other phone companies have curtailed losses by upgrading their networks to attract new broadband customers. Frontier has only grudgingly invested in network upgrades over the last decade, particularly in its legacy copper service areas. The company’s fiber assets were primarily acquired from service territories formerly owned by Verizon and AT&T. Frontier, like CenturyLink and Windstream, attracted shareholders a decade ago by paying out a significant amount of revenue in shareholder dividends. After Frontier made further acquisitions of former Verizon landline territories putting itself deeper into debt, the company suspended its dividend in 2018.

Frontier’s reluctance to invest adequately in its network has been noticed by many of its customers. So have the company’s ongoing billing and service problems. Frontier has been under investigation over its service performance in several states and has left some customers out of service for weeks.

A possible bankruptcy filing would allow the company to renegotiate its debts and labor agreements. Layoffs and restructuring cost cutting would likely follow. Frontier recently sold off its properties in the Pacific Northwest in an effort to raise cash to reduce its debts. Further asset sales could be forthcoming.

California Governor Vetoes Rural Broadband Development Bills; AT&T and Frontier Benefit the Most

Gov. Newsom

California’s efforts to address the state’s ongoing rural broadband problems made little headway in 2019, as Democratic Gov. Gavin Newsom in the past week vetoed (or allowed to expire) the only two broadband measures surviving the treacherous journey through the California legislature.

Assembly Bill 1212 would have made rural broadband a priority for Caltrans — California’s Department of Transportation and the Department of Water Resources, including broadband on recommended lists of projects for funding consideration by two of the state’s largest pension investment funds: the California Public Employees Retirement System and the California State Teachers Retirement System. Current state law only allows pension boards to invest in in-state infrastructure projects that meet certain fiduciary responsibilities. By expanding investment projects to include telecommunications, funding from two major pension funds might have been unlocked and made available to future rural internet projects.

Assembly Bill 417, also known as the Agriculture and Rural Prosperity Act, included several measures targeting rural farming. Two passages in the bill would have included broadband expansion as a new priority for the California Department of Food and Agriculture (DFA):

Due to the central role of agriculture in rural California, it is necessary to achieve a detailed understanding of the economic value that agriculture brings to rural communities and to identify opportunities to improve agricultural productivity, including by increasing broadband access, advancing agricultural innovation, technology, and education, and supporting a well-trained, productive rural workforce, to benefit rural communities.

[…] Making recommendations to the secretary on actions to further the development of rural agricultural economies, including, but not limited to, increasing broadband access, providing technical, resource, and regulatory compliance assistance, advancing agricultural innovation and technology, establishing programs for education and workforce development, and evaluating recreation and tourism opportunities.

Several other proposed measures, including AB 1409 which would have created a fund for providing wireless hotspots for students and Wi-Fi service on school buses was killed last spring behind closed doors in the California Assembly’s Appropriations Committee. The annual attempt by AT&T and other telecom companies to write their own laws to deregulate themselves (this time AB 1366), was suddenly pulled from committee consideration by its author back in September.

That the two mild measures made it through the legislature to the governor’s desk was not surprising considering the sheer number of minor bills that pile up on Newsom’s desk. But for both to suffer quiet deaths through veto or expiration despite almost no public opposition speaks to the power of Sacramento insider politics.

Newsom’s explanation for killing AB 1212 was hardly compelling, as he explained he felt the measure was “unnecessary” because “existing law already encourages public retirement systems to invest in state infrastructure.” But that explanation ignores decades of state government bureaucracy, where agencies zealously guard their funding and protect their own existing project priorities to the hilt. AB 417 would have expanded the mission of the DFA, something the governor argued should only be done in the state budget and only within the specific context of the broader mission of the department, whatever that means. The head of the DFA was likely thrilled anyway.

Telecom consultant Steve Blum notes Caltrans and other state agencies were unlikely to ever consider rural broadband a funding priority, unless it was intended for their own use. Blum also believes the most likely suspects responsible for convincing the governor to kill both bills were the heads of the departments themselves.

“The simplest explanation for Newsom’s vetoes is that Caltrans, DWR and/or DFA staff asked him to do it, because those are jobs they don’t want to do,” Blum wrote on his blog. “That sort of opposition was why a Caltrans dig once policy bill was watered down in 2016.”

Blum believes the state’s largest phone companies will benefit the most from the outcome of the 2019 legislative session.

“Newsom’s vetoes bolster AT&T’s and Frontier’s rural monopoly business model, which redlines poorer and less densely populated communities and leaves them with low speed DSL service, if they’re lucky enough to get anything at all,” he wrote.

The loss of AB 1212 and 417 won’t change much for Californians waiting for rural broadband. Neither measure would have led to any immediate improvement in internet access in the less populated areas of the state. But the measures would have set a foundation to bring two more state agencies into the fight to tackle rural broadband issues.

Ultimately, just as in other states, a large amount of money will have to be found to wire those still without internet access. Governments and regulators can either make rural internet expansion a contingency of future merger deals or other business-government transactions or find suitable funding to subsidize the cost of internet expansion by for-profit companies, rural co-ops, or local governments willing to tackle the problem on the local level.

Nevada’s Attorney General Finds Frontier Internet Lacking, Wins Refunds and Upgrades

Frontier residential customers in Nevada could receive a refund and improved service after a court filing from the Nevada Attorney General’s Bureau of Consumer Protection (BCP) found Frontier’s internet services lacking.

Since 2017, BCP has collected scores of complaints about Frontier’s internet service and its performance, mostly regarding slow service, frequent outages, and ongoing billing problems.

The BCP found Frontier liable under NRS Chapter 598 which forbids providers from misleading consumers about internet speed and service performance in marketing and advertising. An Assurance of Discontinuance filed with the court allowed Frontier to settle while avoiding admitting any wrongdoing and agreeing to correct service deficiencies.

The state found Frontier repeatedly did not disclose limitations of broadband service availability and knowingly marketed its DSL service at speeds the company could not provide customers.

According to the court document:

  • Frontier is required to “clearly and conspicuously” disclose in its print and broadcast advertising the actual internet speeds available to customers in terms of minimum and maximum speed.
  • Customers that sign up for a high-speed plan that Frontier cannot provide may switch to a lower speed plan or discontinue service incurring no penalties or early cancellation fees.
  • Existing customers that do not receive at least 90% of the highest speed their current plan advertises will receive a service credit of 50% of the internet charge for each month Frontier did not provide such speed. Credits will begin in 2020 and end three years after the date the court accepts the Assurance.
  • Frontier has also agreed to invest at least $1 million to improve internet service in Elko County.

Frontier Urgently Trying to Restructure $17 Billion Debt as Chapter 11 Looms

Frontier Communications is preparing a detailed plan for bondholders explaining how the company hopes to cut its $17 billion in debt before it faces the possibility of bankruptcy.

The Wall Street Journal reports Frontier is ready to begin formal negotiations with those holding its debt to create a new payback plan before it faces the first of several repayment deadlines for bonds running into the billions, starting in 2022. But the strategy is risky because if any of the company’s major bondholders disagree, it could put Frontier on a fast track to Chapter 11 bankruptcy reorganization.

Frontier’s debt problems are a consequence of its decision to expand its wireline footprint through acquisitions of castoff copper landline networks being sold primarily by Verizon Communications and AT&T. Critics have repeatedly called out Frontier for bungling network transitions with extended service outages, billing problems, and other customer service-related failures that left customers and some state regulators frustrated and alienated. The company is still facing regulatory review in states like Connecticut, where it failed to properly manage a customer cutover from AT&T’s systems to its own, and in Utah, West Virginia, California, and Florida where similar cutovers from Verizon Communications left more than a few customers without service and months of billing problems.

As a result, Frontier lost many of the customers it acquired, with many unwilling to consider doing business with the phone company ever again.

Although Frontier’s latest acquisitions of Verizon landline customers in California, Texas, and Florida included large Verizon FiOS fiber to the home territories, Frontier customers continue to disconnect service at a greater pace than the phone company’s chief cable competitors — Comcast and Charter Spectrum. Customer defections are even worse in large sections of Frontier’s stagnant “legacy” markets — service areas that have been managed by Frontier or its predecessor Citizens Communications for decades. That is because almost all of those legacy markets are still serviced by decades-old copper wire networks, many capable only of providing low speed DSL internet access.

Frontier’s large debt load is cited as the principal reason the company cannot embark on upgrade efforts to replace existing copper wiring with optical fiber. In fact, virtually all of Frontier’s fiber service areas have been acquired from AT&T or Verizon. Frontier executives have attempted to placate shareholders by promising to aggressively manage costs. But promises of dramatic savings have proved elusive and frequent media reports have emerged covering extensive service outages, poor network maintenance, ongoing billing and customer service issues, and inadequate staffing to address a growing number of service outages and problems. In several states, repeated 911 outages have triggered regulator investigations with the prospect of stiff fines.

Three Frontier insiders have privately shared their insights with Stop the Cap! about ongoing frustrations with the company and the most recent developments.

“Upper management has no comprehension that in many of our markets, customers have choices and they abandon us when all we can sell is DSL service at speeds often less than 12 Mbps,” one senior regional executive told us. “Our retention efforts are so poor these days, representatives are not really expected to rescue accounts because in most cases there is no legitimate reason to do business with us. In some states where there are high mandated surcharges, we cost more than our cable competitors.”

Another mid-level executive in one of Frontier’s largest legacy markets — Rochester, N.Y., said morale is low and a growing number of colleagues believe the days to bankruptcy are short.

Frontier Communications debt load.

“Our loyal customers are literally dying off, as their adult children disconnect decades-old landline accounts,” said an executive who wished to remain anonymous because they were not authorized to speak with the media. “The customer numbers have been ugly for a long time and are getting worse. Our recently retired customers who have had DSL and voice service with us since the 1990s are disconnecting because some have gone with Spectrum and others are moving out of the area. Some of these customers hate Spectrum and won’t do business with them no matter the price, but we are losing their business anyway when they move out of state.”

The Rochester executive noted Frontier has an impossible job trying to sell its internet and voice products against Charter Spectrum.

“Their offers are $40 a month for 100 Mbps internet and $10 for unlimited local and long-distance calls,” the executive noted. “Ours costs nearly $30 just for the phone line after taxes and fees, and how can you sell someone DSL that delivers less than 6 Mbps to many parts of a market still served by copper trunk lines to a central office several miles away? They also find out they have to lease our modem at an additional fee and there are other fees in the contract many customers have learned to look for. Answer: you can’t.”

A Frontier executive in Ohio shared a similar story.

“We hold our own in our rural markets where we can offer a customer better than dial-up internet, and our service is very good if you live in an area where we expanded broadband thanks to FCC subsidies. Some of these new areas are even served by fiber,” the executive explained. “The problem with this is fewer people live in rural areas and these places cost a lot more to maintain when we dispatch service crews or have to run new cable. For Frontier to be truly successful, we have to get better internet service into our larger older markets, but that means pulling copper off poles and putting up fiber and there is just no interest from the higher ups to spend the money to do this. So instead the company bought new territories to keep revenue numbers up, but we are also quickly losing many of those customers to cable too. I really don’t know what we will do when wireless companies offer 5G internet.”

Some Frontier bondholders recognize Frontier must reduce its debt to have the financial resources to expand fiber service. Others want the company to shed its legacy copper service areas (while keeping FiOS/U-verse enabled markets) either to regional companies willing to invest in upgrades or to hedge funds that would likely ring whatever remaining value still exists out of these abandoned service areas. Some suspect these hedge funds would also load up the spinoff companies with even greater debt to facilitate dividend payouts and other investor-friendly rewards.

It will be up to state and federal regulators to protect Frontier’s customers as the two emerging groups of conflicting bondholders angle to protect their investments, perhaps at the risk of reliable phone and internet service.

The Wall Street Journal:

One, including Elliott Management and Franklin Resources, pushed for an exchange of their bonds at a discount to their face value for new secured debt that would be paid before unsecured debt in a potential bankruptcy.

Still, bondholders including GoldenTree Asset Management have warned the company against doing such a swap since 2018, arguing it violated the terms of their bonds.

The company this week reached out to Houlihan Lokey, which represents a group of bondholders that includes GoldenTree—as well as JPMorgan Chase & Co., Oaktree Capital Management and Brigade Capital Management—to sign up to view a confidential restructuring proposal, a person familiar with the matter said. That group has yet to gather enough holders to form a majority, people familiar with the matter said.

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