Citrone’s Discovery Urges Frontier Bankruptcy to Preserve Value

(Bloomberg) -- Frontier Communications Corp. should file for bankruptcy sooner rather than later to get ahead of deterioration of the business and “cracks” in U.S. credit markets, according to Robert Citrone’s hedge fund.

Further delays as the telecom company tries to organize creditors will erode cash and confidence in the business, Discovery Capital Management LLC said in an Oct. 24 letter to Frontier’s board that was reviewed by Bloomberg. Financial markets are pricing in a 99% chance that Frontier will file for bankruptcy over the next two years, according to the letter, which was signed by portfolio manager Douglas Ormond and copied to Citrone, founder of the investment firm.

Click here for full text of letter

Frontier faces dwindling liquidity as “cracks begin to appear in the U.S. credit markets,” and could be in danger of violating terms of its debt, Discovery wrote. The firm represents longtime investors in Frontier.

Frontier declined to comment. The company and the hedge fund are both based in Norwalk, Connecticut.

Risk Factors

“Normally haste makes waste, but in this instance we believe haste limits waste,” Ormond said in the letter. “The further the delays in addressing the balance sheet and state of the business in a court-supervised process, the greater the risk to the corporation, operating assets, employees and surrounding Norwalk.”

Increasing subscriber losses and turnover, combined with limited financial guidance, will only lead to further deterioration in the business, according to the letter.

Discovery’s stance puts it at odds with the position taken in June by Mark Brodsky’s Aurelius Capital Management LP, which called for Frontier to pursue an out-of-court debt exchange and said there’s no “defensible basis” for the company to file for Chapter 11 bankruptcy. Creditors have been pushing the company for talks about reworking its $17 billion debt load.

A spokesman for Aurelius declined to comment on whether Aurelius is still involved in Frontier.

Advisers for the creditors have signed non-disclosure agreements, but substantive negotiations have yet to begin.

Frontier is one of the biggest targets for investors in deeply distressed companies at a time when such candidates are relatively sparse. The company ranks as the largest issuer of performing debt with yields above 20%, according to data compiled by Bloomberg Intelligence. At least half a dozen sets of its notes trade for less than half of face value.

The last time Frontier posted an annual profit was 2014, with cumulative net losses topping $8 billion, including more than $5 billion this year. Still, the company reported $786 million of liquidity and operating free cash flow of $300 million as of June 30. It’s scheduled to report third-quarter earnings on Nov. 5.

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, Dawn McCarty

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