Frontier Issues Senior Notes

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Frontier Communications Corporation (FTR) plans to issue senior notes worth $500 million that will carry interest of 9.250% and are due to mature in 2021.

The net proceeds will be utilized to repay a portion of its 8.250% senior notes and 7.875% senior notes to mature in 2014 and 2015, respectively. Moreover, it is also anticipated that any balance after paying off the respective senior notes, will be used to fund the company’s general expenses or to repay other outstanding debts.

Moody's ratings agency gave Ba2 ratings to Frontier's proposed note offering, which comes under speculative non-investment grade bonds or junk bonds.

Presently, Frontier has plans to strengthen its balance sheet as well as reduce its leverage (net debt to adjusted operating cash flow) from 3.18 times to 2.5 times through a combination of EBITDA improvements, debt reductions and dividend cuts.

In the last reported quarter, Frontier Communications generated $382.5 million cash flow from operation compared during the quarter while cash and equivalents were $365.8 million in the first quarter of 2012. Long-term debt decreased to $7.6 billion from $8.2 billion at the end of 2011.

The company reduced its annual dividend by 47% to $0.40 per share in fiscal 2011. It is instead focusing on the repayment of its debts. Moreover, the company aims to convert its acquired rural fixed-line from Verizon Communication Inc. (VZ) into its own systems, which is expected to provide cost synergies to the company going forward.

However, we believe that issuing senior notes carrying higher interest rates is mainly driven by mounting interest expense of $665 million, which the company has paid last year. So, to avoid such mounting interest expense and to improve its bottom line, the company has undertaken such measures.

However, we believe that issuing senior notes carrying higher interest rates is mainly driven by mounting interest expense of $665 million or 67 cents per share, which the company has paid last year. So if the company can completely pay off the debt, its EPS will increase to 83 cents, thereby improving its bottom lin growth.

Based in Stamford, Connecticut, Frontier Communications Corporation is a communications company providing offers voice, high-speed Internet, satellite video, wireless Internet data access services to rural areas and small and medium-sized towns and cities.

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