Jefferies

Actionable Ideas for Companies and Sponsors

The Telecommunications Sector Will Face Increasing Distress in 2018

For decades, traditional wireline service providers enjoyed protected monopolies and operated under a regulated return on assets framework. Due to the stability of cash flows, the independent ILECs were able to finance with significant leverage and were often attractive leverage buy-out candidates. However, due to wireless, cable and “over the top” competition, the entire ILEC industry have been experiencing access line losses for several years. This negative and compounding operating trends has started to erode both cash flows and investor confidence. For example, Frontier Communications has seen its stock price decline by 81%, equity market value decline by over $3.3 billion and its bonds trade from par to the 70s over the last 12 months. Moreover, the largest independents have aggregate indebtedness in excess of $55 billion.

As Windstream, Frontier, Consolidated and the other ILECs face continuing customer churn and secular pressures, these companies will need to examine asset sales and exchange offers in order to enhance their financial flexibility to garner enough time to redesign their business models to meet the realities of the evolving telecommunications market.