Frontier Communications Debt is out of hand. Frontier Communications Corporation (FTR) stock has taken a beating in the last few years, and the Frontier Communications debt load is a prime reason. While we hate to see anyone lose money, we have been warning you for two years to stay away from this name. Finally, it came to a pass in August.

We had enough of the back and forth. We said “get out while you can.” Bottom line, we opined for about the fifth time in a year that this stock was to be avoided. But the obscene dividend and hope kept so many in. The stock continued to fall from $12 when we said “get out while you can.”

We told you to get out after shares spiked following Q2 earnings. After another 30% decline, you have lost another 55% from our final get out call. What we said back in fall 2016 remains true today. The loss of customers is simply and absolutely unsustainable.

Customer loss

Customer turnover has been the death of the company. On this front, there has been some slight reason to be positive. Customer churn slowed in the quarter to 2.08%, and improved from 2.24% last quarter. This also is down from the 2.37% before that. This was better than our projections for 2.15%. However, that still means customers are leaving. Let us look deeper into where the losses are stemming from.

Residential Losses

At the end of the last quarter, Frontier had 4,486,000 residential customers, down from 4,585,000 residential customers in Q2 and down from 4,736,000 at the end of Q1.

Coming into the year, there were 4,891,000 residential customers.

This is sad. Continued declines are a fundamental weakness in this name. You simply cannot invest in a name like this when such losses are happening.

The company has played with pricing to try and offset these losses. Total residential revenue was $1.10 billion for Q3 2017, compared to $1.12 billion last quarter. The average monthly residential revenue per customer has fallen too in many quarters, however this was one positive piece of news.

Average monthly revenue per residential customer rose from $80.38 last quarter to $80.91. While the increase is welcomed, keep in mind that this is still down from the mid $80s almost a year ago.

Business Losses

The business client side of the company continues to suffer as well. At the end of the quarter, Frontier lost another net 10,000 customers. It is now down to just 463,000 business-based customers. This is down from 473,000 business-based customers to start the quarter. The company entered the year at 502,000 business customers. We believed that business customer loss would decline, but we were wrong in this regard as the churn rate expanded. With this loss of customers, business revenues were down once again. This is another negative trend that should be a flag to you. Total revenue from business-based customers was $958 million in Q3 2017, vs. $ 982 billion last quarter. Average monthly revenue per business customers also continued to fall.

Broadband Now Losing

Broadband used to be a source of strength for Frontier, but the pain continues here. The company buries these results in tables now, rather than discussing them outright. After the Verizon deal the company gained many broadband customers vs. last year. However, for now the fifth time since we have been covering the name, the company lost broadband subscribers. At the end of the quarter, the company had 4,000,000 broadband customers. This is a decline of another 63,000 subscribers from the 4,063,000 at the start of the quarter. This was also down from 4,271,000 broadband customers to start the year. This is just another reason to avoid the name.

Bottom line? Customer loss is crippling the company and it has weighed on sales with no signs of slowing down. The customer losses are across the board, in all segments.

Big Debt Problems

We also know the company has major debt issues. This is the Armageddon that so many fear. We previously discussed that if, and it is a major “IF” the company could stop the bleeding of customers, which we have shown it has not yet, as well as tackle its debt load, the company could have hope. Well, it took some steps to address the latter. Quad 7 Capital has learned that Frontier Communications has amended its credit agreements with JPMorgan Chase Bank, N.A., and CoBank ACB, respectively.

There are quite a number of moves being made to address the Frontier Communications debt load. What you need to know is that the amendments replace the existing net leverage ratio maintenance test in the credit agreements with a first lien net leverage ratio maintenance test which provides for a maximum first lien net leverage ratio of 1.50 to 1.00 as of the last day of any fiscal quarter, stepping down to 1.35 to 1.00 for the fiscal quarters ending June 30, 2020 and thereafter,. This is a big positive for the company. It does help! We don’t think it is enough to save the company yet, but it is a great start as this move will now provide Frontier with a lot more flexibility in executing on operational initiatives going forward.

What is more, the changes made also amend the covenants to permit junior liens on any debt permitted to be incurred under the credit agreements, while limiting the incurrence of first lien debt. This shows there is continued support from lenders. Of course they want the company to succeed so they can be paid back. But to have better operating flexibility will help growth initiatives and it will help with repaying upcoming note maturities. Further, Frontier will continue to need access to more funding, so this move should help the company be able to borrow more in the future, and manage the company’s capital.

Bottom Line

The debt is a major issue, along with customer loss. The company must tackle both of these issues. We still see no reason to buy the stock. The dividend was being covered by cash flow but we think to right the ship the dividend needs to be cut again if not eliminated. There is no sense in selling here if you have been holding the whole way down, but we definitely would not want anyone buying the name here.


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