Frontier Communications has reached an agreement with bondholders to restructure via a Chapter 11 bankruptcy, reducing its debt by about $10 billion and pumping another $1.1 billion into the telecom company in the form of new financing.

Frontier had been expected to file for bankruptcy for months. The company said late Tuesday that it had reached an agreement with bondholders representing more than 75% of its $11 billion in unsecured bonds on the deal, which is expected to reduce its debt by more than $10 billion. In addition, the company said it has secured about $460 million in debtor-in-possession (DIP) financing, which coupled with its $700 million of cash on hand give it about $1.1 billion in liquidity. Frontier said it filed for Chapter 11 protection with the U.S. Bankruptcy Court for the Southern District of New York on April 14 and will continue to operate normally as it goes through the process.

Frontier had mapped out plans for the restructuring in its amended 10-K filed earlier this month. The company had said it was seeking to reach a prepackaged bankruptcy agreement with bondholders, swapping about $11.7 billion in debt for equity in the company. 

When the dust clears, Frontier expects to emerge from Chapter 11 with about $7.5 billion in debt, considerably smaller than the $17.5 billion in leverage it had carried previously. The company has admitted that it has underinvested in fiber over the years, and in the 10-K said it would need to invest only about $1.4 billion to build out its network -- part of that possibly coming from federal programs -- through 2024.

“We are pleased that constructive engagement with our Bondholders over many months has resulted in a comprehensive recapitalization and restructuring,” chairman of the finance committee of Frontier’s Board of Directors Robert Schriesheim, in a press release. “We do not expect to experience any interruption in providing services to our customers. With a recapitalized balance sheet, we will have the financial flexibility to reposition the company and accelerate its transformation by allocating capital resources and adding talent to enhance our service offerings to our customers while optimizing value for our stakeholders. Under the RSA, our trade vendors will be paid for goods and services provided both before and after the filing date.”

Frontier said it also will continue to pursue the closing of the sale of its system in Washington, Oregon, Idaho, and Montana to Northwest Fiber for $1.352 billion in cash. That deal is expected to close by April 30.

“With this agreement with our bondholders, we can now focus on executing our strategy to drive operational efficiencies and position our business for long-term growth,” Frontier CEO Bernie Han said in the press release. “At the same time, the COVID-19 pandemic continues to impact the entire business community, and our team is focused on ensuring the health and safety of our employees and customers. The services we provide to our customers keeps them connected, safe and informed, and I would like to thank our team for their continued dedication, especially in light of the current environment.”

The FCC said it would make sure Frontier continued to fulfill its obligations to keep its customers connected.

“Staying connected to reliable telephone and Internet services is essential in today’s America—perhaps never more so than during this unprecedented time as we confront the coronavirus pandemic," said Kelly Montieth, chief of the FCC's Wireline Competition Bureau. "As such, I am pleased that Frontier has made clear that consumers will remain connected despite Frontier’s filing of a bankruptcy reorganization plan. As the company undertakes this process, we expect it to comply with all Commission regulatory obligations. We will be vigilant in ensuring both that Frontier’s customers stay connected to vital 911, voice, and broadband services and that Frontier continues to put the federal funds it receives through the Connect America Fund and other universal service programs to work for the American people.”

In a statement, the Communications Workers of America, which represents some Frontier employees, hoped that workers would have a voice in the reorganization.

"Frontier’s front-line employees have a unique insight into the challenges - and opportunities - that the company faces. Unfortunately, Frontier’s management did not engage with CWA members or leadership as part of their negotiations with creditors, denying their workforce a much-needed voice in the future of the company," The CWA said in its statement. "CWA members expect to have input in the direction of the company as the bankruptcy process goes forward."

"Frontier’s front-line employees have a unique insight into the challenges - and opportunities - that the company faces," said the Communications Workers of America. "Unfortunately, Frontier’s management did not engage with CWA members or leadership as part of their negotiations with creditors, denying their workforce a much-needed voice in the future of the company. CWA members expect to have input in the direction of the company as the bankruptcy process goes forward." 

But CWA still supports a way forward for the company. 

"The need for high-speed, reliable communications services is more evident now than ever before. Our position has been clear - Frontier needs the debt relief and financial flexibility to invest in its network and its employees, so that it can provide the service that its customers want and deserve. 

"We call on Frontier and its creditors to work quickly to put Frontier on a strong financial footing and prioritize the long-term gains that will come from investment in Frontier’s network over extracting cash from the company for short-term profit." 

Frontier Communications is expected to file for Chapter 11 bankruptcy protection within the next two weeks, part of a sweeping restructuring plan that would include swapping about $11.7 billion in debt for equity, as well as possibly selling off some assets.

According to a 10-K annual report filing with the Securities and Exchange Commission on March 31, Frontier said it has been in discussions with its bondholders since January. Frontier had been expected to file for Chapter 11 protection for months. Last month it said it would exercise its right to defer about $322 million in interest payment on its debt for 60 days, a move that many saw as a precursor to a prepackaged Chapter 11 filing. In its 10-K, the company said it would defer a $6.8 million interest payment due on April 1 as it continues to negotiate with bondholders over the restructuring.

Frontier still needs its bondholders to sign off on the plan, so there is no guarantee that the proposal will be approved. But the company did say in the documents that a Chapter 11 filing could commence "no later than April 14." 

Frontier outlined a presentation it gave to bondholders in SEC filings regarding that restructuring, blaming its past problems on a serious under investment in fiber infrastructure and an inability to capitalize on the fiber assets it had.

According to the filings, Frontier’s broadband service is available to about 14 million homes, but only 3 million of those residences are passed with fiber. According to the filing, most of Frontier's broadband customers have low-speed digital subscriber line service (DSL). About 30% of its customers have service with download speeds of 0-12 megabits per second; 35% have download speeds of 13-24 Mbps and only 6% have download speeds of 24 Mbps or higher. The company has managed to survive mainly because in many of its markets it is the only provider.

Frontier admits that it has not invested in fiber over the years. And it believes that if its restructuring plan is approved, it would have the necessary capital to build out its network. But even then it said it would only invest about $1.4 billion -- part of that possibly coming from the FCC’s Rural Digital Opportunity Fund -- through 2024.

Frontier’s biggest problem is its debt, currently at about $17.5 billion, accumulated through a series of now questionable acquisitions over the past few years, mainly its $10.5 billion purchase of Fios assets in California, Florida and Texas in 2016. Those obligations have prevented the company from investing adequately in its network and as subscribers continue to defect from its broadband services, its financials have faltered.

Revenue has been on a steady decline over the past few years -- $9.1 billions in 2017 to $8.1 billion in 2019 -- and is expected to fall further in 2020. Net losses have tripled in the same time frame, from $1.8 billion in 2017 to $5.9 billion in 2019.

By increasing its emphasis on fiber, Han and the rest of the Frontier team believe they can begin to reverse the company's history of declines, but it will take time. According to the SEC filings, Frontier doesn’t expected to turn a profit

Current Frontier stockholders would likely be left in the lurch in a Chapter 11 filing -- in most of those cases, current equity is valued at 0 and retired and replaced with shares in a new entity.

Frontier hired former Dish Network chief operating officer Bernie Han as its CEO in December, and he has been working hard to hammer out a deal with bondholders. According to the SEC filings, Frontier believes with its debt problems out of the way and a new focus on fiber, it can grow revenue and cash flow over time.

But it wouldn’t be immediate. According to the restructuring plan, Frontier revenue would decline over the next four years -- from about $7 billion in 2020 to about $5 billion in 2024 -- as it shifts from a legacy copper-based business to a fiber-centric operation. But by 2024, when fiber accounts for 47% of revenue (it’s at about 34% now), it will have a customer base that is more profitable. By Frontier’s estimates, fiber cash flow will grow at a 6.1% clip from 2019 to 2024, and at a 10.2% rate between 2024 and 2031. Cash flow at the legacy copper business is expected to decline from about $2.2 billion in 2019 to $900 million by 2031.