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Frontier has Options to Avoid Bankruptcy, Aurelius Says

Allison McNeely

(Bloomberg) -- Aurelius Capital Management LP is calling for Frontier Communications Corp. to pursue an out-of-court debt exchange and says there’s no “defensible basis” for the company to file for Chapter 11 bankruptcy before trying its proposal. Frontier’s stock and bonds rose.

Mark Brodsky’s hedge fund holds Frontier shares, a “substantial amount” of some Frontier notes, and a long position in Frontier’s debts through credit default swaps, according to a June 19 letter to Frontier’s board. The debt holdings include so-called non-CTF unsecured bonds due in 2022 and 2023. Aurelius isn’t a member of any ad hoc bondholder group, according to the letter, which was signed by Managing Director Dennis Prieto.

Aurelius’s recommendations “provide a road map for the board to create substantial value for Frontier’s shareholders, both through de-levering and by increasing the option value inherent in the stock,” the letter said. “In contrast, a near-term Chapter 11 would result in a wipe-out for shareholders.”

A representative for Frontier declined to comment. The company’s shares rose as much as 23% and its 7.125% notes due in January 2023 gained 1.5 cents on the dollar to 61.5 cents.

Click here to see a copy of the Aurelius letter

Frontier creditors have been calling for the telecommunications company to engage in negotiations to address its $17 billion of debt. The company recently appointed new board members with turnaround experience, and agreed to a $1.4 billion asset sale. Some bondholders have called for an out-of-court transaction amid speculation that the company might seek Chapter 11 protection.

Aurelius said the company should exchange or tender for $3.5 billion of CTF and non-CTF bonds maturing in 2022 and 2023 and 51% of the CTF bonds due in 2025, with the 2022 and 2025 CTF notes amending their lien covenant as part of the transaction. Participating holders would receive new secured debt and possibly cash, having a value about 10% above current market prices.

Debt Impact

The suggested transaction would allow Frontier to extend its debt, reduce net borrowings by more than $1.5 billion and generate $200 million in annual interest expense savings, Aurelius said. Leverage would be cut from 4.74 times to 4.26 times a key measure of earnings, according to the letter. It would also free up cash flow and enhance the company’s ability to deleverage further, such as by purchasing more long-dated unsecured bonds.

Frontier’s debt situation is also fundamentally different than what happened to Windstream Holdings Inc. -- which filed for bankruptcy after Aurelius alleged a debt default -- because that case turned on Windstream violating the plain language of its covenants, according to the letter.

“Respectfully, the Windstream decision should play no role in your decision regarding Frontier’s capital structure,” Aurelius said. A Windstream representative declined to comment.

The company shouldn’t seek to pursue an out-of-court comprehensive restructuring of its unsecured bonds, as some holders of back-end bonds have sought, because it is a “mirage” that will “immutably and swiftly” lead to Frontier filing for bankruptcy, Aurelius said.

Even if Aurelius’s proposal fails, “Chapter 11 will be no less available than it is today,” the hedge fund said. “Indeed, the threat of Chapter 11 should put the company in a strong position in negotiations with holders of near-dated bonds regarding the exchange/tender offer.”

(Updates shares and bonds in the fourth paragraph and adds Chapter 11 comment in the last.)

--With assistance from Bill Haubert.

To contact the reporter on this story: Allison McNeely in New York at amcneely@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, Nicole Bullock

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