The path from bankruptcy

Frontier filed for bankruptcy in 2020 with $17.5bn in funded debt, having struggled to realize the gains of an aggressive expansion strategy, including a $10.54bn leveraged acquisition of Verizon’s broadband and landline operations in California, Texas, and Florida.

These expansions, in addition to over levering the company’s capital structure, also proved difficult to execute. Contending with outages and service disruptions in its expanded coverage area and facing stiff competition in the industry, the company began to lose customers: According to its bankruptcy filings, it had roughly 4.1m customers in 2019, down 1.3m from its peak in 2016.

In September 2019, the company began negotiations with holders of its senior notes, a roster including GoldenTree, Elliott Investment Management, Silver Point, Glendon, Cerberus, and Apollo representing roughly 80% of its unsecured debt. After extensive negotiations, the parties reached a pre-packaged deal in April 2020 and the company filed for bankruptcy protection.

The main target of the restructuring agreement was an aggregate $11bn in unsecured debt, $6.6bn of which it raised to acquire the Verizon assets in 2016. Secured lenders were either paid back or had their debt reinstated in the reorganized company, while equity holders were wiped out completely, according to bankruptcy filings.

Frontier’s Pre Bankruptcy Capital Structure. Source: Bankruptcy filings 

The unsecured noteholders positioned themselves as the fulcrum, equitizing the majority of the debt into 100% of Frontier’s new common equity (subject to dilution from the MIP) along with $750m in takeback debt. The company emerged from bankruptcy anew, complete with a new management team (Vodafone UK’s CEO Nick Jeffery stepped in as CEO), $11bn less debt, and plans for a new “bold and ambitious” fiber build program.

Source: Bankruptcy Filings

This group appears to have taken control at a fortuitous moment, with the bankruptcy giving the company means to aggressively rollout its fiber program that now forms the basis of today’s merger deal.

“It was by virtue of our discounting our bonds and taking a haircut and equity that enabled them to have the cash flow to start applying it towards the fiber build out, not to mention, during bankruptcy, they're not paying interest,” one creditor-turned shareholder told 9fin.

In the wake of the bankruptcy, the company also took to the ABS market as it expanded its fiber network, becoming the first public company to issue such securities collateralized by its fiber assets, as 9fin reported. In June 2024, for example, the company marketed $1.025bn TLB due 2031 with JP Morgan.

This strategy has allowed Frontier to put cash on its balance sheet and pay down its other debt at a cheaper cost of capital.

In total, it threw roughly $4.1bn into its fiber build out, according to the company, and it has been fruitful: Fiber now drives roughly 50% of its revenue. According to its Q3 2024 results, the company saw a 12.1% growth in consumer fiber revenue from the same period last year.

The strategy has proved lucrative for many of the company’s prepetition noteholders turned shareholders. Ares, which was part of the ad hoc group of bondholders that held approximately 80% of the $11bn in unsecured notes, became its largest institutional shareholder and likely achieved an IRR north of 62.07% — what its IRR would be assuming the firm purchased all its debt at par. Assuming the firm, which has ample distressed debt investing experience, bought its position for an average 30% discount, then its IRR jumps to 80.61%, according to 9fin estimates. Glendon and Cerberus, two large shareholders who were once its unsecured lenders, also likely saw high returns. 

Other funds, such as HG Vora, who had stakes post bankruptcy but later exited still saw wins from their investment. 

“We were involved in Frontier and it was a very profitable investment. We have since exited,” a spokesperson for HG Vora said.

Calculations based off publicly available data in regulatory and bankruptcy filings solely for the treatment of unsecured notes. Assumes $750mn in take back debt was split pro rata between creditors with 3.75% interest rate. Does not include other positions. 

The merger

Verizon announced its plans to buy Frontier on 5 September at $38.50 per share, a 44% premium on its contemporaneous trading price.

Last week’s vote by Frontier’s shareholder’s now means the company has cleared what was gearing up to be a major hurdle as several institutional holders – despite both post bankruptcy gains the offer premium — were vying for a better price. 

Glendon, for example, said in an October letter to shareholders that two recent fiber deals– T-Mobile’spurchase of Lumos in April 2024 and its joint acquisition of Metronet with KKR in July 2024 — would imply a higher fiber per passing valuation than that contemplated by Verizon’s offer, pushing the company to improve the price by 30%.

The investor did not respond to 9fin’s request for comment. 

Glendon was joined by shareholders Cooper Investors PTY and Carronade Capital in publicly urging shareholders to vote down the deal. Cerberus is also reported to have opposed the deal.

Bell Canada’s acquisition of Ziply Fiber also cast uncertainty over the deal, with analysts at New Street Research reporting that Ziply nabbed a large premium over what Verizon is paying for Frontier. Bell Canada is reported to have been outbid by Verizon when itself made an offer for Frontier.

But all these deals can’t be compared so easily side by side, one analyst told 9fin. “Ziply has significantly more fiber than others. I think everything is a function of the capex you’ve already spent, and Ziply has spent the highest to upgrade,” the analyst said.

Frontier has also not fully completed its Fiber build out and has plans for an additional 2.8m fiber locations by 2026.

“There’s still a lot of spending to be had, and that brings down the multiple,” the investor said.

The deal is probably the most anticipated of recent fiber M&A deals in the telecoms space, signifying the possibilities of tapping into fiber as a turnaround.

The merger will combine Verizon’s roughly 7.4m fiber connections to Frontier’s 2.2m subscribers, according to Verizon.

Most recently, AI-driven data demand has provoked much speculation about the future prospects of telecoms companies — Lumen Technologies, for example, has also staked its future on the technology, and there has been a rush of fiber driven M&A activity in the telecoms space.

Despite the pushback, shareholders like Glendon whose fates improved drastically through the company’s bankruptcy stand to reap even more rewards if the deal clears regulatory hurdles as their share prices hover around 40% above where they began in 2021.

“Today’s vote demonstrates the strong value of the fiber business we have built over the past four years and our ability to expand access to reliable connectivity for more Americans,”  Nick Jeffery, Frontier’s CEO said in a statement. “We look forward to closing this transaction by the first quarter of 2026 and beginning to deliver our premium fiber offering to millions more customers across our combined network.”

Verizon and Frontier did not respond to 9fin’s inquiries.