1: condition 1, p 3
The proposed transaction must be restructured to allow FairPoint to reduce its bond debt level by $600 million, thereby reducing the associated interest expense and debt leverage levels. A $600 million reduction in bond debt for the new enterprise is important and appropriate because:
the bond debt will carry a materially higher interest cost than the bank loan;
the bond debt issuance is at this point entirely uncommitted and subject to prevailing difficult credit market conditions;
bond debt reduction results in debt leverage ratios that are lower and more consistent with the Embarq and Alltel spin-offs (although still not as low);
bond debt reduction results in debt leverage ratios that are more consistent with investment grade bond ratings, which in turn are crucial for a public utility providing a necessary and essential service under challenging business conditions;
bond debt reduction will increase cash flow and permit further discretionary reduction of bank loan debt;
even if bond debt is reduced at this level, proceeds to Verizon [BEGIN SUPER CONFIDENTIAL] will still exceed the implied wireline valuation as calculated by Verizon. [END SUPER CONFIDENTIAL]
2. (footnote 17, p 12)
17 The amount of debt that would be borne by FairPoint was an important consideration for Verizon. Its original information letter, sent to sent to parties possibly interested in purchasing the NNE properties, asked for [BEGIN CONFIDENTIAL] “the specific total dollar amount of debt” that the FairPoint could support. [END CONFIDENTIAL]
3. (footnote 34, p 20)
34 There is no doubt about the risk that interest rates will rise, and FairPoint recognizes that risk. The federal funds rate that is contained in [BEGIN CONFIDENTIAL] the “Control” page of the FairPoint financial model is 4.75%. [END CONFIDENTIAL] However, the federal funds rate, as of July 12, 2007, was already higher -- at 5.25%. Brevitz Direct, p. 41, ll. 20-24.
4. p 21
FairPoint is not [BEGIN CONFIDENTIAL] making a commitment to use its surplus cash to reduce [END CONFIDENTIAL] its debt. 39 FairPoint’s financial model suggests that by the year [BEGIN CONFIDENTIAL] 2015, FairPoint would have reduced its debt by $318 million. However, as Walter Leach confirmed at hearing, that reduction is only an assumption, made for modeling purposes. FairPoint is making no plan and no commitment to reduce its debt over the next seven-year period. [END CONFIDENTIAL]40Id
5. p 21, footnote 38
38 Id., p. 43, ll. 1-3. Even with its limited ability to hedge interest rates, FairPoint remains exposed to trends of increasing interest rates, particularly since [BEGIN CONFIDENTIAL] its financial projections show that it will continue to have significant long term debt, and will have to refinance most if not all of that debt, $1.5 billion or more, at or before maturity. [END CONFIDENTIAL]Brevitz Direct, p. 43, ll. 3-8.
6. p 21, footnote 40
40 In its response to OPA-I-30-6, FairPoint states [BEGIN CONFIDENTIAL] “FairPoint has not made and is unwilling to make a binding commitment to use cash flows after dividends solely for debt reduction.” [END CONFIDENTIAL]OPA Exhibit# 25.
