Building out Frontier Communications fiber network via $1.05 B securitized debt offering

Frontier Communications has nearly three million broadband internet subscribers across 25 states, on a network that reaches about 5.5 million homes and businesses via fiber and another 10 million via copper. About a third of Frontier’s potential fiber customers subscribe, three times the rate of those on copper lines.  Frontier built fiber to an additional 339,000 locations in Q1 2023, ending the quarter with 5.5 million fiber passings and 15.4 million total passings. The company also added a record 87,000 fiber subs in the period, extending that customer total to 1.76 million (1.65 million residential and 110,000 business customers).

However, building out its fiber network will cost more than Frontier’s management forecast when the company emerged from bankruptcy in early 2021. Its latest two million locations cost an average of $830 to deploy. In May, management said it expects the remainder of this year’s build to cost between $1,000 and $1,100 per location. It costs Frontier another $600 or so to send a technician to a customer’s home to plug in all the necessary equipment and the like.

Light Reading reports that Vikash Harlalka, telecom analyst at New Street Research, estimates that Frontier’s fiber buildout plan faces a funding gap of about $2.3 billion.  However, Frontier Communications’ plan to offer $1.05 billion in securitized debt, with the potential to upsize it, will significantly cut down the company’s funding gap to build fiber to 10 million locations by 2025. The company said:

An indirect subsidiary of the Company intends to offer approximately $1.05 billion aggregate principal amount of secured fiber network revenue term notes (the “Notes”), with the potential to upsize, subject to market conditions and other factors. The Notes will be secured by certain of Frontier’s fiber assets and associated customer contracts in the Dallas metropolitan area and constitute the first offering of green bonds by a Frontier subsidiary.

“The offering should close nearly half the gap (more than half, if the offering is upsized.  It takes most of the funding risk off the table,” Harlalka explained in a research note, adding that the move also unlocks a new market for Frontier to tap into for its funding needs.  Harlalka noted that Frontier had about $2.7 billion in liquidity at the end of the first quarter of 2023 – enough to meet the company’s capital needs until mid-2024.  “This new debt raise should extend that beyond 2024,” he added.

Frontier said the debt offer will be secured by a portion of the company’s fiber assets and associated customer contracts in the Dallas metropolitan area, and marks the first offering of “green bonds” by a Frontier subsidiary. The offer will go toward capital expenditures and research and development, “in line with Frontier’s fiber expansion and copper migration strategies,” the company said.

Last week, Frontier stock dropped 21.3% after The Wall Street Journal reported on potential health risks posed by lead-sheathed copper wires in old networks across the U.S. Frontier declined to comment.  The stock decline continued on Monday July 17th with FYBR hitting a low of $11.65 on huge volume of 12,063,100 shares.  It rebounded 43.95% in the next four trading days to close at $16.77 on Friday July 21st (albeit on very light volume).

New Street analyst Jonathan Chaplin estimates that remediation costs to Frontier could reach $6 billion if it is required to rip out all the lead-covered copper on its own dime within five years. But there’s overlap with upgrading those same lines to fiber, and Chaplin calculates a $75 fair value for the stock in this unlikely scenario. “Even if it comes to pass, we see upside to the stock,” he writes.

Frontier is scheduled to announce Q2 2023 results on Friday, August 4th.


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