It takes pressure off Maggie & BOD but at what cost?
To get to the effective interest rate FTR is paying you add the Wall St fees of about 1.7% to whatever the call premium is for the bonds being retired and then you compute actual APR just like you do with up front points on a mortgage. The call premiums look big -- somewhere in the 3% range but its hard to tell without having a schedule of prorated interest due to compare it to the call price. If it's 3% then the discount points FTR is paying will be 4.7% the same as saying the $750 mil will yield a net $715 mil or so but of course interest is due on the entire $750 mil.
It''s the safe thing to do to preserve the payroll machine. The effective rate in the example above of 3 points call premium puts the effective interest rate over 8%.
The call premium is $30 per bond, with each bond currently traeing over $1,100, so the amout is less than the 3% you assert. Additionally, if you read the release this morning you will see that FTR has added certain bonds not due until 2017 which have a rate of over 8%. This would appear to indicate that they already have buyer(s) of a large portion of the new bonds, who view the retirement of the 2015-2017 bonds that are eligible for tender as a valuable investment. To far from retirment, so I do not generally purchase bonds, but if I were I would seriously see about getting in on the new FTR bond issue.
"Considering the ordinary interest rate on bonds, even for a company which might be considered "high yield" (the current ratings for Frontier by Moodys is BB2, which is not great but not quite to the "high yield" level), is currently 5.65% (according to CNN Money's listing of yield rates). These proposed bonds will be used to retire debt that is currently over 7% due in 2015--meaning that it is still considered long term debt for financial statement purposes). As such, this refinancing will save the company approximately 1.5% (or more) while neither increasing or decreasing the long term debt on the company's financial statement. Intelligent action, which will assist in increasing the bottom line."
Keep sharing your "great" insight and wisdom... pfft.
"The call premium is $30 per bond, with each bond currently trading over $1,100, so the amount is less than the 3% you assert."
Dude -- get a grip.
Those bonds,"...trading over $1100" have a par of $1000 each and that the debt that is being retired.
Think about it -- some of the money in the $1100 area you refer to is accumulated period interest due so that's why I didn't have an exact total call premium. The 430 you refer to is a little extra but it's not the full call premium.
Hopefully, the street will continue to short FTR so we can get the price back down to the low $3 range where we can add to our positions just like last year. The debt refinancing gives FTR a great shot at preserving the dividend for the next several years. As I have said in another post the new CFO is doing an excellent job. I would go short here but I'm afraid the 1st quarter numbers may be better than expected and don't want to get caught in a short squeeze.