The Frontier Bankruptcy

Bloomberg reported that Frontier Communications is hoping to file a structured bankruptcy in March. A structured bankruptcy is one where existing creditors agree to cut debt owed to them to help a company survive. There is no guarantee that the existing creditors will go along with Frontier’s plan, and if not, the bankruptcy would be handed to a bankruptcy court to resolve.

It’s been obvious for a long time that Frontier is in trouble. Three years ago, the stock sat at over $51 per share. By January 2018 it had fallen to $8.26 per share, and to $2 per share a year ago. As I write this blog the stock sits at 59 cents per share.

Frontier has been losing customers rapidly. In the year ending September 30, 2019 the company lost 6% of its broadband customers (247,000), with 71,000 of the losses occurring during the third quarter of last year.

For those not familiar with the history of Frontier, the company started as Citizens Telephone Company, a typical small independent telco. The company grew by buying telephone customers from GTE, Contel, and Alltel. The company became Frontier when they bought the remains of the Rochester Telephone Company from Global Crossings. Since then Frontier went on a buying spree and purchased large numbers of customers from Verizon.

Frontiers woes intensified in 2016 when they bungled the takeover of Verizon FiOS customers while taking on huge debt. There were major outages in some major markets that drove customers to change to the cable company competitor. However, Frontier’s biggest problem is due to operating a lot of rural copper networks. The copper networks they purchased had been maintained poorly before acquired by Frontier. For example, Frontier bought all of the Verizon customers in West Virginia, and Verizon had been ignoring the market and had been trying to sell it for over fifteen years.

Frontier got a small boost when the FCC gave them $1.7 billion to upgrade rural DSL to speeds of at least 10/1 Mbps. This month Frontier reports that it has not fully met that requirement in parts of thirteen states. Customers in many places where Frontier has supposedly made the upgrades are saying that speeds are not yet at the required 10/1 Mbps.

Frontier’s real problem is that their rural properties are being overbuilt by other ISPs. For example, Frontier properties are the targets of funding for many state broadband grants. Most of the rural Frontier network is going to be targeted in the upcoming $16 billion RDOF grants this year. It would not be surprising to see the company quietly disappear from rural America as others build better broadband.

Meanwhile, other than in properties that formerly were Verizon FiOS on fiber, the company’s networks in towns are also providing DSL. We’ve seen every telco that offers DSL in urban areas like AT&T and CenturyLink lose a lot of customers year-after-year to the cable companies. It’s increasingly difficult for DSL to keep customers with speeds between 10 Mbps and 50 Mbps when competing against cable products of 100 Mbps and higher.

Last May, Frontier announced the sale of its properties in Washington, Oregon, Idaho and Montana to WaveDivision Capital. That sale was for $1.35 billion, which doesn’t make a big dent in the company’s $16.3 billion in long-term debt. Frontier has also shed 10% of its workforce in an attempt to control costs.

Frontier may get the structured bankruptcy they are seeking or may have to give up more to survive this current bankruptcy. However, restructuring their debt is not going to make up for the huge amounts of its network that sits on dying copper. They are not the only company facing this issue and CenturyLink has even more rural copper. However, CenturyLink has a thriving business in big cities and would be stronger if regulators ever allow it to walk away from rural copper.

The harder question to answer is if there is a viable company remaining after Frontier finally sheds or loses its rural customer base. I don’t know enough to make any prediction on that, but I can predict that the company’s problems will not be over even after making it through this bankruptcy.